Networking Our Customers Strong Customers AT&T: The World ...

Networking MakesOur Customers Strong

CustomersMakeUs Strong

AT&T: The World’s Networking Company

Annual Report 2002

Networking Makes Our Customers Strong

Our customers continue to benefit from our leadership role in networking.

O Continuing to outperform the industry in customer satisfaction and innovationO Ongoing investment to meet the needs of enterprises and individuals who place a high value on

communicationsO Offering unmatched capabilities in managing end-to-end mission critical business applicationsO Growing in our role as the industry-leading Internet protocol (IP) provider O Continuing to be recognized as a critical partner and a preeminent provider of high-quality servicesO Applying AT&T Labs expertise to networking solutions of tomorrow while meeting customer needs todayO Delivering to customers a real return on their communications investment through more than 36,000

networking expertsO Delivering international direct-dial service to more than 250 countries and territories, and in-bound calling services

for travelers in 200 countries through AT&T Direct ServiceO Offering real competitive choice in local, long distance and Internet services

Customers Make Us Strong

AT&T continues to benefit by satisfying the needs of its customers.

O Managing nearly 50 million consumer relationships and 4 million business customers O Creating one of the strongest financial structures and best balance sheets in the industry O Realizing annual revenue of more than $37 billionO Leading the industry in customer satisfactionO Forming a unified communications services company with approximately 71,000 employees in 56 countriesO Ranking as one of the largest online billers with more than 1 million residential customers billed onlineO Serving as the official provider of personal telecommunications services to military personnel serving at 529 military

bases and camps worldwide and on more than 200 U.S. Navy shipsO Serving more than 2.4 million households, with residential AT&T Local Service in California, Georgia, Illinois,

Michigan, New Jersey, New York, Ohio and Texas as of December 2002, with more states to follow

AT&T: The World’s Networking Company

AT&T continues to operate the most sophisticated and reliable global network.

O Having one of the most experienced leadership teams in the industry O Carrying more than 310 million long distance calls on an average business day, with more than

99.99 percent completed on the first tryO Handling approximately 2,700 trillion bytes (terabytes) of data on an average business dayO Leading in long distance backbone optical fiber, with more than 50,000 route miles, plus more than 19,600 route

miles of local metro fiberO Leading the industry in IP traffic growthO Operating 18 Internet data centers on three continentsO Having approximately 2,900 points of presence in 850 cities across 60 nationsO Operating with 95 intelligent optical switches onlineO Providing, first ever, 10-gigabit-per-second service (OC-192) coast-to-coastO Leading in Dense Wave Division Multiplexing with 1,600 systems deployed, including Ultravailable Networks for

enterprise customers

To my fellow shareowners: AT&T launched a new era in 2002 – an era marked by more than just a change inthe chairman’s office. We spun off our broadband operations. We completed our restructuring plan. And we intro-duced a new management team focused on serving customers and building shareowner value.

At the same time, we accelerated our efforts to transform AT&T from a primarily voice-services business to thelargest provider of data services globally. We reached out to expand our relationships with clients around theworld. And we realigned to focus less on individual products and more on integrated customer solutions.

In short, we rededicated ourselves to AT&T’s 118-year legacy of service, quality, reliability and innovation. And wecommitted to fulfilling our mission as “the world’s networking company.”

While we focused on meeting our goals and seeking new market opportunities, waves of uncertainty crashedaround us. The world braced for terror and war. The global economy stumbled. And the telecom industry sufferedbankruptcies and accounting scandals that dragged down some of our major competitors.

Those telecom schemes conjured up phony market economics and phantom prices that no competitor could fairlymatch. The companies involved saw their reputations rightly ravaged.

AT&T, on the other hand, rose above the fray. We remained focused on our customers. And we met our financialcommitments during every quarter of 2002, performing with both vigor and integrity. Today, we stand tall – proud tobe one of the world’s strongest telecommunications providers.

Our strength stems from our values, a set of principles we call “Our Common Bond.” Formally adopted in 1992, thevalues of “Our Common Bond” have been hallmarks of the AT&T culture for more than 100 years: respect for indi-viduals, dedication to helping customers, highest standards of integrity, innovation and teamwork. Our commit-ment to these principles cannot be compromised.

Nor can our commitment to our shareowners. That’s why we diligently overhauled our balance sheet. Our restruc-turing effort reduced AT&T’s net debt* from $56.2 billion entering 2001 to $12.9 billion at year-end 2002. We nowenjoy the lowest overall net debt level among the major players in our industry. *In 2001, net debt of $56.2 billion wasnet of $0.1 billion of cash and $8.7 billion of monetizations. In 2002, net debt of $12.9 billion was net of $8.5 billion ofcash, $0.5 billion of monetizations and $0.7 billion of fluctuations in foreign debt value.

To maintain and magnify our financial strength, we’re taking a disciplined approach to our ongoing cost and capi-tal structure. Our network investments are largely behind us. We spent $3.9 billion in capital expenditures in 2002,roughly half the 1999 level, and we’ll continue to moderate our spending going forward.

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O With significant financial strength and leverage, a world-class network and

one of the most qualified management teams focused on transforming the

business, AT&T is committed and poised to meet the needs of its customers

better than anyone in the industry.

We expect the majority of our 2003 capital expenditures to be demand-driven and success-based. The primary focus for the remaining capital expenditures will be enhancing our products and processes toimprove service and customer satisfaction. So while our distressed competitors struggle to keep the lights on, we’llcontinue to pump up productivity and make it easier for customers to do business with AT&T.

Our business customers are already seeing results from the $500 million we invested in process improvements in2002. We slashed cycle times an average of 30 percent last year. That means we cut days – and in some casesweeks – off the interval between a customer’s order and activation of their services. The result: We’re setting newstandards for sales, provisioning, billing, and service that our competitors simply can’t match.

Our world-class standards and services are attracting new business customers, and winning back others con-cerned about our competitors’ well-publicized troubles. We continue to gain market share as companies increas-ingly value the reliability, sustainability, integrity and quality behind the AT&T brand. And we will continue to pro-mote these advantages as we target new customers and take additional market share in 2003.

Maintaining our scale and broad customer base will be critical as we face ongoing declines in both consumer andbusiness long distance voice revenue. Several trends are driving these declines:

• Customers are relying increasingly on wireless and Internet communications.

• As the regional Bell operating companies (RBOCs) enter long distance, competition and price pressures mount.

• Our success in attracting quality wholesale customers has shifted the proportions of retail and reduced-pricedwholesale minutes that run on our network.

• Consumers are taking advantage of lower-priced products, such as prepaid cards and optional calling plans.

We are managing through these declines by scaling our growth investments. In 2002, we outperformed the indus-try and gained share in all the key growth areas of our business – business local, data, Internet protocol (IP) andmanaged services. These services represent our future; their growth helps offset erosion in long distance voice.

These services are also at the heart of the AT&T Business portfolio, which will be the primary driver of our futurerevenue. A leading global provider of enterprise communications solutions, AT&T Business delivered nearly $27 billion to our top line in 2002.

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O With a focus on innovation and quality, AT&T Consumer is expanding its

portfolio of services, including offering local service (with long distance) in

more and more states. AT&T Consumer extended local service from two

states in 2001 to eight states in 2002.

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For more than 4 million customers throughout the world, AT&T Business serves as a strategic partner. For largeenterprise customers, we design, deploy, manage and enhance networks, ensuring industry-leading levels of con-tinuity and security. Our services help these customers unlock the full value of their applications while managingcomplexity, improving productivity, and generating a return on their communications investments.

We are the undisputed industry leader in IP traffic, after being in sixth place only two years ago. Our IP traffic isgrowing at a rate three times faster than the rest of the industry. The AT&T network now carries one petabyte of IPtraffic per day. To print that amount of data on paper, you’d need about 50 million trees – or a forest about the sizeof New Orleans. And you’d need to re-grow that forest every day.

The growth of AT&T Business will be fueled, in part, by AT&T Consumer, which contributed nearly $12 billion in2002 revenue. AT&T Consumer manages nearly 50 million customer relationships with consumers, who count onus for long distance, local, Internet and transactional services such as prepaid cards and collect calling. If it werea standalone business, AT&T Consumer would rank among the Fortune 200.

We continue to expand our consumer-service portfolio. A key growth area is our local and long distance bundle for consumers and small businesses. We offer these combined services via the unbundled network elements plat-form, or UNE-P. That platform allows AT&T and other carriers to lease from the RBOCs the network elements need-ed to deliver services along the “last mile,” which connects directly to the customer.

By the end of 2002, more than 2.4 million AT&T residential customers were enjoying the features and price benefitsthat result from UNE-P-based competition. As of this writing, our residential local customer base has grown tomore than 2.7 million. We also have more than 500,000 access lines serving small businesses through UNE-P.

More consumers and small businesses will enjoy the benefits of competition thanks to a Federal CommunicationsCommission decision announced in February 2003. The RBOCs lobbied furiously to eliminate UNE-P and reducecompetitive choice. But the Commission voted to allow the states to decide what works and what doesn’t, ratherthan impose a national “one-size-fits all” mandate. Now we will take our case to the states, and we will enter mar-kets where the economic conditions allow us to make a reasonable return using UNE-P.

Our initial results prove that customers want choice and will support a competitive offer. We have earned mid single-digit market share or higher in our first eight markets. We doubled our number of all-distance customers in2002. In the fourth quarter alone, the number grew more than 25 percent from the previous quarter.

O Meeting the communications needs of businesses worldwide, AT&T Business

delivers the most reliable and secure enterprise networking solutions

with local-to-global reach, end-to-end network management and world-class

professional expertise.

This pattern suggests strong opportunities for growth in new markets as well. We are confident that we will be offer-ing all-distance service in a total of 14-17 markets by the end of 2003, with more markets to follow in 2004.

But getting there won’t be easy. In the months ahead, the challenges facing our industry will continue. Current mar-ket signals point to ongoing economic weakness and lower information technology (IT) spending.

We recognize, however, that this downturn won’t last forever. The economy will eventually rebound, IT spendingwill resume, and telecom’s trials will end. We’re preparing today for that turnaround by channeling our resources tokeep our company strong and to position AT&T as one of the primary beneficiaries of an economic upswing.

We are the only long distance carrier upgrading its network and service portfolio. We are the only carrier enhanc-ing its customer-facing processes and increasing its sales presence. And we are among the few carriers operatingfrom a position of unquestioned financial flexibility and strength. So when the market recovers, our scale, scopeand stability will make AT&T the company to beat.

That’s why, despite the challenges, I feel so proud and privileged to be leading this company. While our competi-tors are still getting organized, we’ve already assembled all the ingredients for success – solid financials, a world-class global network, an intense customer focus and unshakable values.

Our people are passionate about satisfying customers and building shareowner value. We are working as onecompany, one network and one team to deliver a level of excellence that others must strive mightily to attain.

Outstanding innovation, enduring integrity, and a flawless customer experience... our customers, employees andyou – our shareowners – should expect nothing less from the world’s networking company.

David DormanChairman and Chief Executive Officer

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With a shared commitment to Our Common Bond, values that bind the people

of AT&T, we are dedicated to satisfying customer needs and building value

for shareowners.

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O Financial Report Contents

Seven-Year Summary of Selected Financial Data 6

Management's Discussion and Analysis 7

Report of Management 35

Report of Independent Accountants 36

Consolidated Statements of Operations 37

Consolidated Balance Sheets 38

Consolidated Statements of Changes in Shareowners' Equity 39

Consolidated Statements of Cash Flows 41

Notes to Consolidated Financial Statements 42

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AT&T CORP. AND SUBSIDIARIES

SEVEN-YEAR SUMMARY OF SELECTED FINANCIAL DATA(1)

2002 2001 2000 1999 1998 1997 1996

(Unaudited)(Dollars in millions, except per share amounts)

RESULTS OF OPERATIONSAND EARNINGS PERSHARE

Revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 37,827 $ 42,197 $ 46,850 $ 49,609 $ 47,287 $ 46,226 $ 45,716

Operating income ÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,361 7,832 12,793 12,544 7,632 6,835 8,341

Income (loss) from continuingoperations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 963 (2,640) 9,532 6,019 4,915 4,088 5,064

INCOME FROMCONTINUINGOPERATIONS

AT&T Common Stock Group:(2)

Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 963 71 8,044 8,041 4,915 4,088 5,064

Earnings (loss) per basic share 1.29 (0.91) 11.54 13.04 9.18 7.65 9.60

Earnings (loss) per dilutedshare ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.26 (0.91) 11.01 12.61 9.10 7.65 9.60

Cash dividends declared pershare ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.75 0.75 3.4875 4.40 4.40 4.40 4.40

Liberty Media Group:(2)

(Loss) incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (2,711) 1,488 (2,022) Ì Ì Ì

(Loss) earnings per basic anddiluted share ÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (1.05) 0.58 (0.80) Ì Ì Ì

ASSETS AND CAPITAL

Property, plant and equipment,netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 25,604 $ 26,803 $ 26,083 $ 25,587 $ 21,780 $ 19,177 $ 16,871

Total assets Ì continuingoperations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 55,272 62,329 90,293 89,554 40,134 41,029 38,229

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 55,272 165,481 242,802 169,499 59,550 67,690 63,669

Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18,812 24,025 13,572 13,543 5,555 7,840 8,861

Total debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22,574 34,159 42,338 25,091 6,638 11,895 11,334

Shareowners' equity ÏÏÏÏÏÏÏÏÏÏÏ 12,312 51,680 103,198 78,927 25,522 23,678 21,092

Debt ratio(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 64.7% 86.3% 122.1% 83.7% 36.7% 57.2% 61.6%

OTHER INFORMATION

Employees Ì continuingoperations(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 71,000 77,700 84,800 96,500 94,500 116,800 117,100

AT&T year-end stock price pershare ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 26.11 $ 37.19 $ 27.57 $ 80.81 $ 79.88 $ 65.02 $ 43.91

(1) Prior period amounts have been restated to reÖect the spin-oÅ of AT&T Broadband and the 1-for-5 reversestock split, as applicable, both of which occurred on November 18, 2002.

(2) In connection with the March 9, 1999 merger with Tele-Communications, Inc., AT&T issued separatetracking stock for Liberty Media Group (LMG). LMG was accounted for as an equity investment prior toits split-oÅ from AT&T on August 10, 2001. There were no dividends declared for LMG tracking stock.AT&T Common Stock Group results exclude LMG.

(3) Debt ratio reÖects debt from continuing operations as a percent of total capital, excluding discontinuedoperations and LMG, (debt plus equity, excluding LMG and discontinued operations).

(4) Data provided excludes LMG.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

AT&T Corp. (AT&T or the ""Company'') is among the world's communications leaders, providing voiceand data communications services to large and small businesses, consumers and government agencies. Weprovide domestic and international long distance, regional and local communications services, and data andInternet communications services.

Restructuring of AT&T

In conjunction with the restructuring of AT&T announced on October 25, 2000, AT&T Broadband,AT&T Wireless, and Liberty Media Corporation have all been separated from AT&T.

On November 18, 2002, AT&T spun-oÅ AT&T Broadband (which was primarily comprised of theAT&T Broadband segment) to AT&T shareowners. Simultaneously, AT&T Broadband combined withComcast Corporation (Comcast). The combination was accomplished through a distribution of stock toAT&T shareowners, who received 0.3235 of a share (1.6175 shares adjusted for the 1-for-5 reverse stock split)of Comcast Class A common stock for each share of AT&T they owned at market close on November 15,2002, the record date. The Internal Revenue Service (IRS) ruled that the transaction qualiÑed as tax-free forAT&T and its shareowners for U.S. federal income tax purposes, with the exception of cash received forfractional shares. Approximately 1.2 billion new Comcast shares were issued to AT&T shareowners at a valueof approximately $31.1 billion, based on the Comcast stock price on November 18, 2002. AT&T shareownersreceived a 56% economic stake and a 66% voting interest in new Comcast.

In connection with the non-pro rata spin-oÅ of AT&T Broadband, AT&T wrote up the net assets ofAT&T Broadband to fair value. This resulted in a noncash gain of $1.3 billion, which represented thediÅerence between the fair value of the AT&T Broadband business at the date of the spin-oÅ and AT&T'sbook value in AT&T Broadband, net of certain charges triggered by the spin-oÅ and their related income taxeÅect. These charges included compensation expense due to the accelerated vesting of stock options as well asthe enhancement of certain incentive plans. The gain was recorded in 2002 as a ""Gain on disposition ofdiscontinued operations.''

On August 10, 2001, AT&T completed the split-oÅ of Liberty Media Corporation as an independent,publicly-traded company. Since, at the time of disposition, AT&T did not exit the line of business that LibertyMedia Group (LMG) operated in, LMG was not accounted for as a discontinued operation. AT&T redeemedeach outstanding share of Class A and Class B Liberty Media Group (LMG) tracking stock for one share ofLiberty Media Corporation's Series A and Series B common stock, respectively. The IRS ruled that the split-oÅ of Liberty Media Corporation qualiÑed as a tax-free transaction for AT&T, Liberty Media and theirshareowners. For accounting purposes, the deemed eÅective split-oÅ date was July 31, 2001. The operatingresults from August 1, 2001, through August 10, 2001, were deemed immaterial to our consolidated results.

The LMG tracking stock, which had reÖected 100% of the performance of LMG, was issued in 1999 inconnection with AT&T's acquisition of Tele-Communications, Inc. (TCI). AT&T did not have a controllingÑnancial interest in LMG for Ñnancial accounting purposes; therefore, AT&T's ownership in LMG wasreÖected as an investment accounted for under the equity method in AT&T's consolidated Ñnancialstatements. The amounts attributable to LMG are reÖected in the accompanying Consolidated Statements ofOperations as ""Equity (losses) earnings from Liberty Media Group'' prior to its split-oÅ from AT&T.

On July 9, 2001, AT&T completed the split-oÅ of AT&T Wireless as a separate, independently-tradedcompany. All AT&T Wireless Group tracking stock was converted into AT&T Wireless common stock on aone-for-one basis and 1,136 million shares of AT&T Wireless common stock held by AT&T were distributedto AT&T common shareowners on a basis of 0.3218 of a share (1.609 shares adjusted for the 1-for-5 reversestock split) of AT&T Wireless for each AT&T share outstanding. AT&T common shareowners receivedwhole shares of AT&T Wireless and cash payments for fractional shares. The IRS ruled that the transactionqualiÑed as tax-free for AT&T and its shareowners for U.S. federal income tax purposes, with the exception of

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

cash received for fractional shares. For accounting purposes, the deemed eÅective split-oÅ date was June 30,2001. The impact of operating results from July 1, 2001 through July 9, 2001, were deemed immaterial to ourconsolidated results. The split-oÅ of AT&T Wireless resulted in a noncash tax-free gain of $13.5 billion, whichrepresented the diÅerence between the fair value of the AT&T Wireless tracking stock at the date of the split-oÅ and AT&T's book value in AT&T Wireless. This gain was recorded in 2001 as a ""Gain on disposition ofdiscontinued operations.'' At the time of split-oÅ, AT&T retained approximately $3 billion, or 7.3%, of AT&TWireless common stock.

AT&T issued the AT&T Wireless tracking stock in April 2000, to track the Ñnancial performance ofAT&T Wireless Group. The shares initially issued tracked approximately 16% of the performance of AT&TWireless Group.

The earnings attributable to AT&T Wireless Group are excluded from the earnings available to AT&TCommon Stock Group and are included in ""Net (loss) from discontinued operations.'' Similarly, the earningsand losses related to LMG are excluded from the earnings available to AT&T Common Stock Group. Theremaining results of operations of AT&T, including the Ñnancial performance of AT&T Wireless Group notrepresented by the tracking stock, is referred to as the AT&T Common Stock Group and is represented byAT&T common stock.

Forward-Looking Statements

This document may contain forward-looking statements with respect to AT&T's Ñnancial condition,results of operations, cash Öows, dividends, Ñnancing plans, business strategies, operating eÇciencies orsynergies, budgets, capital and other expenditures, network build-out and upgrade, competitive positions,availability of capital, growth opportunities for existing products, beneÑts from new technologies, availabilityand deployment of new technologies, plans and objectives of management, and other matters.

These forward-looking statements, including, without limitation, those relating to the future businessprospects, revenue, working capital, liquidity, capital needs, network build-out, interest costs and income, arenecessary estimates reÖecting the best judgment of senior management that rely on a number of assumptionsconcerning future events, many of which are outside AT&T's control, and involve a number of risks anduncertainties that could cause actual results to diÅer materially from those suggested by the forward-lookingstatements. These forward-looking statements should, therefore, be considered in light of various importantfactors that could cause actual results to diÅer materially from estimates or projections contained in theforward-looking statements including, without limitation:

‚ the impact of existing and new competitors in the markets in which AT&T competes, includingcompetitors that may oÅer less expensive products and services, desirable or innovative products,technological substitutes, or have extensive resources or better Ñnancing,

‚ the impact of oversupply of capacity resulting from excessive deployment of network capacity,

‚ the ongoing global and domestic trend toward consolidation in the telecommunications industry, whichmay have the eÅect of making the competitors of these entities larger and better Ñnanced and aÅordthese competitors with extensive resources and greater geographic reach, allowing them to competemore eÅectively,

‚ the eÅects of vigorous competition in the markets in which the Company operates, which may decreaseprices charged, increase churn and change customer mix and proÑtability,

‚ the ability to establish a signiÑcant market presence in new geographic and service markets,

‚ the availability and cost of capital,

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‚ the impact of any unusual items resulting from ongoing evaluations of the business strategies of theCompany,

‚ the requirements imposed on the Company or latitude allowed to competitors by the FederalCommunications Commission (FCC) or state regulatory commissions under the TelecommunicationsAct of 1996 or other applicable laws and regulations,

‚ the risks associated with technological requirements, wireless, Internet or other technology substitutionand changes and other technological developments,

‚ the results of litigation Ñled or to be Ñled against the Company, and

‚ the possibility of one or more of the markets in which the Company competes being impacted bychanges in political, economic or other factors, such as monetary policy, legal and regulatory changesor other external factors over which the Company has no control.

The words ""estimate,'' ""project,'' ""intend,'' ""expect,'' ""believe,'' ""plan'' and similar expressions areintended to identify forward-looking statements. Readers are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the date this document is Ñled. Moreover, in the future,AT&T, through its senior management, may make forward-looking statements about the matters described inthis document or other matters concerning AT&T.

The discussion and analysis that follows provides information management believes is relevant to anassessment and understanding of AT&T's consolidated results of operations for the years ended December 31,2002, 2001, and 2000, and Ñnancial condition as of December 31, 2002 and 2001.

Critical Accounting Estimates and Judgments

AT&T's Ñnancial statements are prepared in accordance with accounting principles that are generallyaccepted in the United States. The preparation of these Ñnancial statements requires management to makeestimates and judgments that aÅect the reported amounts of assets, liabilities, revenue and expenses as well asthe disclosure of contingent assets and liabilities. Management continually evaluates its estimates andjudgments including those related to useful lives of plant and equipment, pension and other postretirementbeneÑts, income taxes and legal contingencies. Management bases its estimates and judgments on historicalexperience and other factors that are believed to be reasonable under the circumstances. Actual results maydiÅer from these estimates under diÅerent assumptions or conditions. We believe that of our signiÑcantaccounting policies, the following may involve a higher degree of judgment (see note 2 to the consolidatedÑnancial statements for a complete discussion of AT&T's signiÑcant accounting policies):

Estimated useful lives of plant and equipment Ì We estimate the useful lives of plant and equipment inorder to determine the amount of depreciation and amortization expense to be recorded during any reportingperiod. The majority of our telecommunications plant and equipment is depreciated using the group method,which develops a depreciation rate (annually) based on the average useful life of a speciÑc group of assets,rather than the individual asset as would be utilized under the unit method. Such estimated life of the groupchanges as the composition of the group of assets changes and their related lives. The estimated life of thegroup is based on historical experience with similar assets as well as taking into account anticipatedtechnological or other changes. If technological changes were to occur more rapidly than anticipated or in adiÅerent form than anticipated, the useful lives assigned to these assets may need to be shortened, resulting inthe recognition of increased depreciation and amortization expense in future periods. Likewise, if theanticipated technological or other changes occur more slowly than anticipated, the life of the group could beextended based on the life assigned to new assets added to the group. This could result in a reduction ofdepreciation and amortization expense in future periods. A one-year decrease or increase in the useful life of

9



these assets would increase or decrease depreciation and amortization expense by approximately $0.5 billion.We review these types of assets for impairment annually, or when events or circumstances indicate that thecarrying amount may be not be recoverable over the remaining lives of the assets. In assessing impairments,we follow the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, ""Accounting forthe Impairment or Disposal of Long-Lived Assets,'' utilizing cash Öows which take into account manage-ment's estimates of future operations.

Pension and postretirement beneÑts Ì The amounts recognized in the Ñnancial statements related topension and postretirement beneÑts are determined on an actuarial basis utilizing several diÅerent assump-tions. A signiÑcant assumption used in determining our net pension credit (income) and postretirementbeneÑt expense is the expected long-term rate of return on plan assets. In 2002, we used an expected long-term rate of return of 9.0%. For 2003, we will lower this expected rate of return to 8.5%. In determining thisrevised rate, we considered the current and projected investment portfolio mix and estimated long-terminvestment returns for each asset class. The projected portfolio mix of the plan assets is developed inconsideration of the expected duration of related plan obligations and as such is more heavily weighted towardequity investments, including public and private equity positions. Plan assets also include Ñxed income andreal estate investments. The actual return on pension plan assets over the last 10 and 15 years has been 10.4%and 10.9%, respectively, although the return for the last two years has been negative. The expected return onplan assets is determined by applying the expected long-term rate of return to the market-related value of planassets. The market-related value is a calculated value that amortizes the diÅerence between actual andexpected returns evenly over a Ñve-year period. The combined market-related value of plan assets of thepension and postretirement beneÑt plans as of December 31, 2002, was approximately $19.5 billion; about$2 billion higher than the related fair value of plan assets. The expected return on assets of the pension andpostretirement beneÑt plans included in 2002 operating income was income of $1.7 billion. The reduction inthe expected long-term rate of return to 8.5% will reduce the expected return credit by approximately$0.1 billion in 2003.

Another signiÑcant estimate is the discount rate used in the annual actuarial valuation of pension andpostretirement beneÑt plan obligations. In determining the appropriate discount rate at year-end, weconsidered the current yields on high quality corporate Ñxed-income investments with maturities correspond-ing to the expected duration of the beneÑt obligations. As of December 31, 2002, we reduced the discount rateby 75 basis points to 6.5%. Changes in the discount rate do not have a material impact on our results ofoperations.

Income taxes Ì Deferred income taxes are provided for the eÅect of temporary diÅerences between theamounts of assets and liabilities recognized for Ñnancial reporting purposes and the amounts recognized forincome tax purposes. We measure deferred tax assets and liabilities using enacted tax rates that, if changed,would result in either an increase or decrease in the provision for income taxes in the period of change. A one-percentage point increase in the enacted federal income tax rate as of December 31, 2002, would decrease netincome by approximately $0.1 billion. A valuation allowance is recorded when it is more likely than not that adeferred tax asset will not be realized. In assessing the likelihood of realization, management considersestimates of future taxable income, the character of income needed to realize future tax beneÑts, and allavailable evidence.

Legal contingencies Ì We are currently involved in certain legal proceedings and have accrued amountsthat represent our estimate of the probable outcome of these matters. Such estimates of outcome are derivedfrom consultation with outside counsel, as well as an assessment of litigation and settlement strategies. Inaddition, we may be responsible for a portion of certain legal proceedings associated with former aÇliatespursuant to separation and distribution agreements. Such agreements provide AT&T to share in the cost ofcertain litigation (relating to matters while aÇliated with AT&T) if a judgment or settlement exceeds certain

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thresholds. With the exception of the Sparks matter (see Discontinued Operations discussion), as ofDecember 31, 2002, we are not aware of, and have not been advised of, any matters in which it is probable thatcosts would be incurred in excess of the thresholds above which we would be required to share in the costs.However, in the event these former subsidiaries were unable to meet their obligations with respect to theseliabilities due to Ñnancial diÇculties, AT&T could be held responsible for all or a portion of these costs,irrespective of the sharing agreements. Depending on how these matters are resolved, these costs could bematerial.

Consolidated Results of Operations

The comparison of 2002 results with 2001 results was impacted by the April 1, 2002, unwind of Concert,our joint venture with British Telecommunications plc (BT). The venture's assets and customer accountswere distributed back to the parent companies. Under the partnership termination agreement, each of thepartners generally reclaimed the customer contracts and assets that were initially contributed to the jointventure, including international transport facilities and gateway assets. In addition, AT&T assumed certainother assets that BT originally contributed to the joint venture. As a result, 2002 results include revenue andexpenses associated with these customers and businesses for the period April 1, 2002 through December 31,2002, while 2001 and the Ñrst quarter of 2002 includes our proportionate share of Concert's earnings andrelated charges in ""Net losses related to other equity investments.'' In addition, the assets reclaimed areconsolidated in each line item of the Consolidated Balance Sheet at December 31, 2002, versus an equityinvestment in Concert at December 31, 2001, included in ""Other assets.''

For the period August 28, 2000, through December 31, 2002, AT&T's interest in AT&T Latin Americawas fully consolidated in AT&T's results. In December 2002, AT&T signed a non-binding term-sheet for thesale of its 69% economic interest (95% voting interest) in AT&T Latin America and began accounting forAT&T Latin America as an asset held for sale (the operations of AT&T Latin America did not qualify fortreatment as a discontinued operation). As a result of this action, as well as our belief that no changes to theplan will be made and that a sale will be completed within one year, we recorded an impairment charge of$1.0 billion to write down AT&T Latin America's assets and liabilities to fair value, and reclassiÑed theseassets and liabilities to ""Other current assets'' and ""Other current liabilities'' at December 31, 2002.

The consolidated Ñnancial statements of AT&T reÖect AT&T Broadband and AT&T Wireless asdiscontinued operations. AT&T Broadband was spun-oÅ on November 18, 2002, and AT&T Wireless wassplit-oÅ on July 9, 2001. Accordingly, the revenue, costs and expenses and cash Öows of AT&T Broadbandand AT&T Wireless have been excluded from the respective captions in the Consolidated Statements ofOperations and Consolidated Statements of Cash Flows, and have been reported through their respectivedates of separation as ""Net (loss) from discontinued operations'' and as ""Net cash (used in) provided bydiscontinued operations.'' In addition, the assets and liabilities of AT&T Broadband have been excluded fromthe respective captions in the Consolidated Balance Sheet at December 31, 2001, and have been reported as""Current assets of discontinued operations,'' ""Non-current assets of discontinued operations,'' ""Currentliabilities of discontinued operations,'' ""Non-current liabilities of discontinued operations,'' ""Minority Interestof Discontinued Operations,'' and ""Company-Obligated Convertible Quarterly Income Preferred Securities ofSubsidiary Trust Holding Solely Subordinated Debt Securities of AT&T of Discontinued Operations.''

A 1-for-5 reverse stock split of AT&T common stock was eÅected on November 18, 2002. Shares(except shares authorized), per share amounts and stock prices were restated to reÖect the stock split on aretroactive basis. In addition, our stock prices were restated to reÖect the AT&T Broadband disposition.

EÅective July 1, 2000, the FCC eliminated Primary Interexchange Carrier Charges (PICC or per-linecharges) that AT&T pays for residential and single-line business long distance customers. The elimination of

11



these per-line charges resulted in lower access expense as well as lower revenue, since AT&T has historicallybilled its customers for these charges.

For the Years Ended December 31,Revenue2002 2001 2000

(Dollars in millions)

AT&T Business Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $26,558 $27,705 $28,559

AT&T Consumer ServicesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,527 14,843 18,643

Corporate and OtherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (258) (351) (352)

Total Revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $37,827 $42,197 $46,850

Total revenue decreased 10.4%, or $4.4 billion, in 2002 compared with 2001, and decreased 9.9%, or$4.7 billion, in 2001 compared with 2000. The decrease in both years was largely driven by continued declinesin long distance voice revenue of approximately $5.2 billion in 2002 and $5.5 billion in 2001. In addition, 2001revenue declined by $0.5 billion due to the elimination of PICC. The long distance voice decline reÖects theimpact of pricing pressures and substitution, including a shift from higher-priced products such as businessretail to lower-priced products such as business wholesale and prepaid cards. Partially oÅsetting the declineswas growth in data/Internet Protocol(IP)/managed services within AT&T Business Services and local voiceservices within both AT&T Consumer Services and AT&T Business Services of approximately $0.8 billion in2002, and $1.4 billion in 2001. The 2002 variances include a positive impact attributable to the reintegration ofcustomers and assets from the unwind of Concert.

In 2003, we expect our long distance voice revenue to continue to decline due to ongoing competition andproduct substitution. This decline in revenue is expected to be partially oÅset by growth in our local voiceservices and data/IP/managed services.

Revenue by segment is discussed in greater detail in the segment results section.

For the Years Ended December 31,

2002 2001 2000


Access and other connection ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $10,790 $12,085 $13,139

Costs of services and productsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,363 8,621 8,235

Selling, general and administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,988 8,064 7,387

Depreciation and amortizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,888 4,559 4,538

Net restructuring and other charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,437 1,036 758

Total operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $33,466 $34,365 $34,057

Operating income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,361 $ 7,832 $12,793

Operating margin ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11.5% 18.6% 27.3%

Included within access and other connection expenses are costs we pay to connect calls using the facilitiesof other service providers, as well as the Universal Service Fund contributions and per-line charges mandatedby the FCC. Costs paid to telephone companies outside of the United States to connect international calls arealso included within access and other connection expenses.

Access and other connection expenses decreased 10.7%, or $1.3 billion, in 2002 compared with 2001.Approximately $0.5 billion of this decrease was due to lower Universal Service Fund contributions and lowerper-line charges, which were primarily driven by the decline in long distance voice revenue. In addition,domestic access charges decreased by $0.5 billion primarily due to product mix and FCC-mandated access-

12



rate reductions. International connection charges decreased by approximately $0.4 billion driven primarily bylower rates and the reintegration of customers and assets from the unwind of Concert. These reductions werepartially oÅset by an increase in local connectivity costs. Since most of the Universal Service Fundcontributions, per-minute access-rate reductions and per-line charges are passed through to the customer,these reductions generally result in a corresponding reduction in revenue.

In 2003, we expect access rates to be Öat or slightly lower than 2002 as most of the FCC-mandated ratereductions have been implemented. We also expect our local connectivity costs to continue to increase as wecontinue to grow our local voice business.

Access and other connection expenses decreased 8.0%, or $1.1 billion, in 2001 compared with 2000.Approximately $1.6 billion of the decrease was due to mandated reductions in per-minute access rates, lowerper-line charges and lower international connection rates. In July 2000, per-line charges that AT&T paid forresidential and single-line business customers were eliminated by the FCC. These reductions were partiallyoÅset by a $0.6 billion increase due to overall volume growth primarily related to local and internationalservices and higher Universal Service Fund contributions.

Costs of services and products include the costs of operating and maintaining our networks, costs tosupport our outsourcing contracts, the provision for uncollectible receivables and other service-related costs,including the cost of equipment sold.

Costs of services and products decreased $0.3 billion, or 3.0%, in 2002 compared with 2001. Approxi-mately $0.5 billion of the decrease was due to the overall impact of lower revenue and related costs at AT&TConsumer Services and AT&T Business Services. In addition, costs decreased approximately $0.2 billion dueto losses on certain long-term contracts recorded in 2001 by AT&T Business Services. These decreases werepartially oÅset by an increase of $0.1 billion in AT&T Business Services' provision for uncollectible receivablesprimarily attributable to the weak economy. Cost of services and products also increased as a result of thereintegration of customers and assets from the unwind of Concert.

In 2001, these costs increased $0.4 billion, or 4.7%, compared with 2000. The increase was driven byapproximately $0.6 billion of higher costs associated with our growth businesses, primarily at AT&T BusinessServices, including the cost of equipment sold. In addition, costs increased approximately $0.3 billion due toestimated losses on certain long-term contracts at AT&T Business Services and a lower pension credit(income) primarily due to the lower expected long-term rate of return on plan assets and the eÅects of loweractual plan assets. These increases were partially oÅset by approximately $0.4 billion of lower costs associatedwith decreased revenue, primarily lower volumes at AT&T Business Services, including our internationaloperations, and lower payphone compensation costs.

Selling, general and administrative (SG&A) expenses decreased $76 million, or 0.9%, in 2002 comparedwith 2001. This decrease was driven by a reduction in the number of residential customers as well as costcontrol eÅorts of $0.7 billion, and lower transaction costs of $0.2 billion associated with the AT&Trestructuring. Partially oÅsetting these decreases was $0.3 billion of lower pension credits (income) primarilydue to the lower expected long-term rate of return on plan assets and the eÅects of lower actual plan assets,and $0.3 billion associated with increased marketing and sales expenses for new local consumer serviceoÅerings and increased investment for business sales and customer care development. SG&A expenses alsoincreased as a result of the reintegration of customers and assets from the unwind of Concert.

We expect SG&A expenses, and to a lesser extent costs of services and products, will be unfavorablyimpacted in the future due to lower pension credits (income) and higher post-retirement expenses resultingfrom a lower expected long-term rate of return on plan assets in 2003 of 8.5% compared with the 9% rate usedin 2002 and the eÅects of lower actual plan assets. We also expect SG&A expenses to be impacted by higher

13



compensation costs associated with stock options reÖecting the decision to expense stock option grants,commencing with options granted in 2003.

SG&A expenses increased $0.7 billion, or 9.2%, in 2001 compared with 2000. Increased expenses insupport of growth businesses, primarily data/IP/managed services, and local voice services, drove approxi-mately $0.5 billion of the increase. These expenses included infrastructure development costs associated withincreased sales headcount, advertising, and other general and administrative expenses. A lower pension credit(income) and higher postretirement expense resulting from decreased return on plan assets, combined withhigher compensation accruals, contributed approximately $0.3 billion to the increase. Also included in theincreased SG&A expenses were transaction costs of approximately $0.2 billion associated with AT&T'srestructuring announced in October 2000. Partially oÅsetting these increases was the impact of cost controleÅorts as well as decreased customer care and billing expenses of approximately $0.7 billion, primarily fromAT&T Consumer Services.

Depreciation and amortization expenses increased $0.3 billion, or 7.2%, in 2002 compared with 2001. Theincrease was primarily due to a larger asset base resulting from continued infrastructure investment supportingour growth business. The increase was partially oÅset by the adoption of SFAS No. 142, ""Goodwill and OtherIntangible Assets'' as of January 1, 2002, which eliminated the amortization of goodwill. In 2001, we recorded$0.2 billion of amortization expense on goodwill.

In 2003, the adoption of SFAS No. 143, ""Accounting for Asset Retirement Obligations,'' which requiresthat obligations associated with the retirement of tangible long-lived assets be recorded as liabilities only ifsuch liability is unavoidable and legally enforceable, will have a favorable impact on depreciation expense.(See ""New Accounting Pronouncements'' for a further discussion of SFAS No. 143.) However, we continueto invest in our asset base, which will increase depreciation expense in 2003.

Depreciation and amortization expenses increased $21 million in 2001 compared with 2000. The increasewas primarily due to a larger asset base resulting from continued infrastructure investment. Certaininfrastructure assets placed in service in 2001 extended the average life of the overall assets, partiallymitigating the impact of the larger asset base.

Total capital expenditures were $3.9 billion, $5.6 billion and $6.8 billion for 2002, 2001 and 2000,respectively. The decrease in spending was primarily due to cost containment eÅorts. We continue to focus themajority of our capital spending on our growth businesses of data/IP/managed services.

In 2002, net restructuring and other charges were $1,437 million. The net charge included $1,203 millionrelated to AT&T Business Services, $211 million related to AT&T Consumer Services and $23 million relatedto the Corporate and Other group.

Included in the $1,437 million was a $1,029 million charge for the impairment of the net assets of ourconsolidated subsidiary, AT&T Latin America. In December 2002, the AT&T Board of Directors approved aplan for AT&T to sell its approximate 95% voting stake in AT&T Latin America in its current condition. OnDecember 31, 2002, AT&T signed a non-binding term sheet for the sale of our shares within one year for anominal amount. As a result of this plan, we classiÑed AT&T Latin America as an asset ""held for sale'' at fairmarket value, in accordance with SFAS No. 144. Consequently, there are approximately $160 million ofassets (principally cash and accounts receivable) included in Other Current Assets and approximately$160 million of liabilities (principally secured short-term debt) included in Other Current Liabilities. The$1,029 million charge to write the assets and liabilities down to their fair values was reported within our AT&TBusiness Services segment.

Also included in net restructuring and other charges was a $204 million impairment charge related tocertain Digital Subscriber Line (DSL) assets (including internal-use software, licenses, and property, plant &

14



equipment) that will not be utilized by AT&T as result of changes to our ""DSL build'' strategy. Instead ofbuilding DSL capabilities in all geographic areas initially targeted, we have signed an agreement with CovadCommunications to oÅer DSL services over their network. As a result, the assets in these areas were impaired.This charge was reported within our AT&T Consumer Services segment.

In 2002, AT&T recorded net business restructuring charges of $204 million. These activities consisted ofnew exit plans totaling $377 million and reversals of $173 million. The new plans primarily consisted of$334 million for employee separation costs primarily in AT&T Business Services, and $39 million of facilityclosing reserves. Slightly more than 4,800 employees will be separated in conjunction with these exit plans,approximately one-half of which are management employees and one-half are non-management employees.The majority of these employee separations will be involuntary and are largely the result of improved processesand automation in provisioning and maintenance of services for business customers. Due to the timing of theseseparations, these exit plans did not yield cash savings in 2002, nor did we realize a beneÑt to operating incomein 2002. Future cash and expense savings is dependent upon the timing of actual separations and associatedpayments. In the Ñrst full year following the completion of these exit plans, we expect to realize approximately$300 million of cash savings and beneÑt to operating income. Approximately 14% of the employees aÅected bythese exit plans had left their positions by December 31, 2002, and we expect those remaining to leave theirpositions by the end of 2003. Termination beneÑts of approximately $328 million were paid throughout 2002for the current and prior year's separation plans.

The $173 million reversal primarily consisted of $124 million of employee separation costs and$26 million related to prior plan facility closings no longer deemed to be necessary. The reversals wereprimarily due to management's determination that the restructuring plan established in the fourth quarter of2001 for certain areas of AT&T Business Services, including network services, needed to be modiÑed givencurrent industry conditions, as well as the redeployment of certain employees to diÅerent functions within theCompany.

During 2001, net restructuring and other charges were $1,036 million which were primarily comprised of$862 million for employee separations, of which $388 million related to beneÑts to be paid from pension assetsas well as pension and postretirement curtailment losses, and $166 million for facility closings. Therestructuring and exit plans support our cost reduction eÅorts through headcount reductions across allsegments of the business, primarily network support and customer care functions in AT&T Business Services.These charges were slightly oÅset by the reversal of $33 million related to business restructuring plansannounced in the fourth quarter 1999 and the Ñrst quarter 2000 (of which $15 million related to employeeseparations and $18 million related to contract terminations). The net charge consisted of $570 million relatedto AT&T Business Services, $31 million related to AT&T Consumer Services and $435 million related to theCorporate and Other group.

The charge covered separation costs for approximately 10,000 employees, approximately one-half ofwhom were management and one-half were non-management employees. More than 9,000 employeeseparations related to involuntary terminations and the remaining 1,000 were voluntary.

During 2000, we recorded $758 million of net restructuring and other charges which included $586 mil-lion for employee separations associated with AT&T's initiative to reduce costs, of which $144 millionprimarily related to pension and postretirement curtailment losses. The charge also included $91 millionrelated to the government-mandated disposition of AT&T Communications (U.K.) Ltd., which would havecompeted directly with Concert, and $62 million of network lease and other contract termination costsassociated with penalties incurred as part of notifying vendors of the termination of these contracts during theyear. The net charge consisted of $395 million related to AT&T Business Services, $97 million related toAT&T Consumer Services and $266 million related to the Corporate and Other group.

15



These plans covered separation costs for approximately 6,100 employees, mainly in AT&T BusinessServices, including network operations, primarily for the consolidation of customer-care and call centers.Approximately one-half of whom were management employees and one-half were non-management employ-ees. Approximately 5,500 of the employee separations related to involuntary terminations and approximately600 related to voluntary terminations.

AT&T's operating income in 2002 decreased $3.5 billion, or 44.3%, compared with 2001 and decreased$5.0 billion, or 38.8%, in 2001 compared with 2000. AT&T's operating margin was 11.5% in 2002 comparedwith 18.6% in 2001 and 27.3% in 2000. The decline in 2002 was primarily due to the decline in revenuecombined with increased net restructuring and other charges and increased depreciation and amortizationexpenses. Also contributing to the decline was a lower rate of decline in selling, general and administrativeexpenses and costs of services and products compared with the revenue rate of decline. The decline inoperating margin in 2001 was primarily due to a decline in revenue combined with increased selling, generaland administrative expenses, costs of services and products, net restructuring and other charges, anddepreciation and amortization expenses. The operating margin declines in both years reÖect pricing pressuresand a shift from higher-margin retail long distance services to lower-margin wholesale long distance serviceand other lower-margin services such as lower-priced optional calling plans and prepaid cards.

We expect the operating margin to continue to decline in 2003 despite the expected beneÑt from lowernet restructuring and other charges. The expected decline is primarily due to a continued decline in the longdistance business reÖecting the impact of accelerating growth in wholesale services as well as a shift to lower-margin services such as lower-priced optional calling plans and prepaid cards.


2002 2001 2000


Other (expense) income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(77) $1,327 $1,190

Other (expense) income in 2002 was expense of $77 million compared with income of $1.3 billion in2001. The unfavorable variance of $1.4 billion was primarily due to $1.2 billion of higher net gains on sales ofbusinesses and investments in 2001, including gains on the sale of AT&T's retained interest in AT&T Wirelessand Japan Telecom. The unfavorable variance was also due to impairments of $0.2 billion recorded in 2002related to certain leases of aircraft which are accounted for as leveraged leases, $0.2 billion of lower incomerelated to mark-to-market adjustments on derivative instruments and lower investment-related income of$0.2 billion. Favorably impacting other (expense) income were lower investment impairment charges of$0.4 billion in 2002, primarily driven by lower impairment charges for Time Warner Telecom.

At December 31, 2002, we had investments in leveraged leases of aircraft of $601 million ®$(185) millionnet of deferred taxes©, which we lease to airlines as well as aircraft related companies. Several airline carrierswho have leases have recently experienced Ñnancial diÇculties. While these airlines are current on their leaserental payments, we could record additional impairment charges in 2003 if any of these carriers declarebankruptcy or renegotiate their lease terms with us. In addition, in the event of bankruptcy or a renegotiationof lease terms, if any portion of the non-recourse debt is canceled, such amounts would result in taxableincome to AT&T and accordingly a cash tax expense.

Other (expense) income in 2001 was income of $1.3 billion compared with income of $1.2 billion in2000. The favorable variance of $0.1 billion was driven primarily by higher net gains on the sales of businessesand investments of $0.5 billion which reÖect the gains on the sales of AT&T's retained interest in AT&TWireless and Japan Telecom in 2001, $0.2 billion related to the settlement, in 2001, of disputes relating to thebuyer's obligations resulting from the sale of AT&T Universal Card Services, and higher income related tomark-to-market adjustments on derivative instruments of $0.2 billion. Partially oÅsetting these increases was

16



investment impairment charges of $0.5 billion, primarily consisting of the impairment of Time WarnerTelecom, and lower interest income of $0.2 billion.


2002 2001 2000


Interest (expense)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(1,448) $(1,493) $(1,503)

Interest expense decreased $45 million, or 3.0%, in 2002 compared with 2001, and decreased $10 million,or 0.6%, in 2001 compared with 2000. The decrease in both periods was primarily due to lower average debtbalances, reÖecting our debt reduction eÅorts, partially oÅset by higher average interest rates. Average interestrates were higher in both periods due to the mix of short-term and long-term debt. The 2002 average rate wasadversely aÅected by the $10 billion bond oÅering in November 2001. We expect interest expense to be lowerin future periods as a result of our debt reduction eÅorts.


2002 2001 2000


(Provision) for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(1,587) $(2,890) $(4,487)

EÅective tax rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56.0% 37.7% 35.9%

The eÅective tax rate is the provision for income taxes as a percent of income from continuing operationsbefore income taxes. The 2002 rate was adversely impacted by approximately 14.9 percentage points due tothe $1.0 billion impairment charge recorded in 2002 relating to AT&T's interest in AT&T Latin America forwhich no tax beneÑt was recorded. Also negatively impacting the 2002 rate was the impact of AT&T LatinAmerica's losses from operations for which no tax beneÑt was recorded because realization of a tax beneÑt wasnot likely to occur and the losses were not includable in AT&T's consolidated income tax return.

In 2001, the eÅective tax rate was positively impacted by tax beneÑts associated with the tax-free gainfrom the disposal of a portion of AT&T's retained interest in AT&T Wireless in a debt-for-equity exchange,partially oÅset by the consolidation of AT&T Latin America's pretax losses for which no tax beneÑt wasprovided.

In 2000, the eÅective tax rate was positively impacted by the tax beneÑts associated with certain legalentity restructurings and investments.


2002 2001 2000


Minority interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $114 $131 $41

Minority interest income represents an adjustment to AT&T's income to reÖect the less than 100%ownership of consolidated subsidiaries. Minority interest income decreased $17 million in 2002 compared with2001 as a result of lower net losses of AT&T Latin America in 2002. In December 2002, AT&T fully utilizedthe minority interest balance related to AT&T Latin America; therefore, we will no longer record minorityinterest income related to AT&T Latin America.

Minority interest income increased $0.1 billion in 2001 compared with 2000 primarily due to AT&TLatin America, which we acquired on August 28, 2000; therefore, 2001 includes a full year of results,compared with a partial year in 2000.

17




2002 2001 2000


Equity (losses) earnings from Liberty Media Group ÏÏÏÏÏÏÏÏÏÏÏÏ $Ì $(2,711) $1,488

Equity (losses) earnings from LMG, which are recorded net of income taxes, were a loss of $2.7 billion in2001, compared with earnings of $1.5 billion in 2000. The decline of $4.2 billion was largely driven by gains ondispositions recorded in 2000, including gains associated with the mergers of various companies that LMG hadinvestments in, as well as higher stock compensation expense in 2001 compared with 2000. Partially oÅsettingthese declines were lower impairment charges recorded on LMG's investments to reÖect other than temporarydeclines in value. Equity losses for 2001 reÖect results through July 31, 2001, the deemed eÅective date of thesplit-oÅ.


2002 2001 2000


Net (losses) earnings related to other equity investmentsÏÏÏÏÏÏÏÏ $(400) $(4,836) $10

Net (losses) related to other equity investments, which are recorded net of income taxes, declined$4.4 billion in 2002 compared with 2001 due to lower net losses of $2.1 billion for Concert, $1.5 billion forAT&T Canada and $0.8 billion for Net2Phone, primarily resulting from impairment charges recorded in 2001.

Net (losses) related to other equity investments, net of income taxes, were $4.8 billion in 2001 comparedwith income of $10 million in 2000. The unfavorable variance of $4.8 billion was primarily due to greaterlosses of $2.2 billion for Concert, $1.8 billion for AT&T Canada and $0.8 billion for Net2Phone primarily dueto impairment charges recorded in 2001.

The after-tax amortization of excess basis associated with nonconsolidated investments, recorded as areduction of income, totaled $36 million in 2001, and $37 million in 2000.

EÅective January 1, 2002, in accordance with the provisions of SFAS No. 142, we no longer amortizeexcess basis related to nonconsolidated investments.


2002 2001 2000


Net (loss) from discontinued operations, net of income taxes ÏÏ $(14,513) $(4,052) $(4,863)

Gain on disposition of discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,324 13,503 Ì

Net (loss) from discontinued operations, net of income taxes, primarily represents the operating results ofAT&T Broadband and AT&T Wireless, which AT&T disposed of and accounted for as discontinuedoperations. Accordingly, the revenue, costs and expenses of AT&T Broadband and AT&T Wireless have beenexcluded from the respective captions in the Consolidated Statements of Operations.

In 2002, the net (loss) from discontinued operations included a loss of $14.5 billion from thediscontinued operations of AT&T Broadband, and an estimated loss on the litigation settlement associatedwith the business of Lucent Technologies Inc., which was spun-oÅ from AT&T in 1996 and accounted for as adiscontinued operation. Sparks, et al. v. AT&T and Lucent Technologies Inc. et al., was a class action lawsuitÑled in 1996 in Illinois state court. On August 9, 2002, a settlement proposal was submitted to and accepted bythe court. In accordance with the separation and distribution agreement between AT&T and LucentTechnologies Inc., AT&T recorded its proportionate share of the settlement and estimated legal costs, whichtotaled $33 million, net of tax. Depending upon the number of claims submitted and accepted, the actual cost

18



of the settlement to AT&T may be less than stated amounts, but it is not possible to estimate the amount atthis time.

In 2002, we realized a noncash gain on the disposition of AT&T Broadband of $1.3 billion, whichrepresented the diÅerence between the fair value of AT&T Broadband at the date of the spin-oÅ and AT&T'sbook value, net of certain charges triggered by the spin-oÅ of $159 million, and the related income tax eÅect of$61 million. These charges included compensation expense due to the accelerated vesting of stock options aswell as the enhancement of certain incentive plans.

In 2001, the net (loss) from discontinued operations included a loss of $4.2 billion from the discontinuedoperations of AT&T Broadband, and income of $150 million from the discontinued operations of AT&TWireless.

In 2001, we realized a tax-free noncash gain on the disposition of discontinued operations of $13.5 billion,representing the diÅerence between the fair value of the AT&T Wireless tracking stock at the date of the split-oÅ and AT&T's book value.

In 2000, the net (loss) from discontinued operations consisted of a loss of $5.4 billion from thediscontinued operations of AT&T Broadband, and income of $536 million from the discontinued operations ofAT&T Wireless.


2002 2001 2000


Cumulative eÅect of accounting changes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(856) $904 $Ì

EÅective January 1, 2002, we adopted SFAS No. 142, ""Goodwill and Other Intangible Assets.'' Inaccordance with SFAS No. 142, franchise costs were tested for impairment as of January 1, 2002, bycomparing the fair value to the carrying value (at the market level). As a result of this test, an impairment loss(related to discontinued operations) of $0.9 billion, net of income taxes of $0.5 billion, was recorded in 2002.

EÅective January 1, 2001, we adopted SFAS No. 133, ""Accounting for Derivative Instruments andHedging Activities.'' The cumulative eÅect of this accounting change, net of applicable income taxes, wascomprised of $0.4 billion for AT&T Group (of which $0.2 billion related to discontinued operations) and$0.5 billion for LMG. The $0.4 billion recorded by AT&T Group was attributable primarily to fair valueadjustments of equity derivative instruments embedded in indexed debt instruments and warrants held inpublic and private companies. The $0.5 billion recorded by LMG represents the impact of separately recordingthe embedded call option obligations associated with LMG's senior exchangeable debentures.


2002 2001 2000


Dividend requirements of preferred stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $Ì $(652) $Ì

Premium on exchange of AT&T Wireless tracking stock ÏÏÏÏÏÏÏ Ì (80) Ì

Dividend requirements of preferred stock were $0.7 billion in 2001. The preferred stock dividendrepresented interest in connection with convertible preferred stock issued to NTT DoCoMo in January of 2001as well as accretion of the beneÑcial conversion feature associated with this preferred stock. The beneÑcialconversion feature was computed upon the issuance of the NTT DoCoMo preferred stock and represented theexcess of the fair value of the preferred shares issued over the proceeds received. This beneÑcial feature wasbeing accreted over the time period DoCoMo was required to hold the shares. On July 9, 2001, in conjunctionwith the split-oÅ of AT&T Wireless Group, these preferred shares were converted into AT&T Wirelesscommon stock. As a result, the beneÑcial conversion feature was fully accreted.

19



In May 2001, AT&T completed an exchange oÅer of AT&T common stock for AT&T Wireless trackingstock. In 2001, this exchange resulted in a premium of $80 million, which was a reduction of net incomeavailable to common shareowners. The premium represented the excess of the fair value of the AT&TWireless tracking stock issued over the fair value of the AT&T common stock exchanged and was calculatedbased on the closing share prices of AT&T common stock and AT&T Wireless tracking stock on May 25,2001.

Segment Results

AT&T's results are segmented according to the customers we service: AT&T Business Services andAT&T Consumer Services. The balance of AT&T's continuing operations (excluding LMG) is included in a""Corporate and Other'' group. This group primarily reÖects corporate staÅ functions and the elimination oftransactions between segments. The discussion of segment results includes revenue, earnings before interestand taxes (EBIT), capital additions and total assets.

EBIT is the primary measure used by AT&T's chief operating decision makers to measure AT&T'soperating results and to measure segment proÑtability and performance. AT&T calculates EBIT as operatingincome plus other (expense) income, net, pretax minority interest income and pretax net (losses) earningsrelated to other equity investments. Interest and income taxes are not factored into the segment proÑtabilitymeasure used by the chief operating decision makers; therefore, trends for these items are discussed on aconsolidated basis. Management believes EBIT is meaningful to investors because it provides an analysis ofoperating results using the same measure used by AT&T's chief operating decision makers. EBIT for AT&Twas $3.9 billion, $1.5 billion and $14.0 billion for the years ended December 31, 2002, 2001 and 2000,respectively. We provide EBIT, a measure not calculated in accordance with generally accepted accountingprinciples (GAAP), for AT&T in order to provide investors a means to evaluate the Ñnancial results of eachsegment in relation to total AT&T. The table below provides a reconciliation of EBIT to operating income.Our calculations of EBIT may or may not be consistent with the calculation of this measure by other publiccompanies. EBIT should not be viewed by investors as an alternative to a GAAP measure of performance,such as operating income.

For the Years Ended December 31,Reconciliation of EBIT to Operating Income2002 2001 2000


EBIT ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3,886 $1,507 $13,973

Deduct:

Other (expense) income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (77) 1,327 1,190

Minority interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 114 131 41

Pretax net (losses) related to other equity investments ÏÏÏÏÏÏÏ (512) (7,783) (51)

Operating income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,361 $7,832 $12,793

Total assets for each segment generally include all assets, except intercompany receivables. Prepaidpension assets and corporate-owned or leased real estate are generally held at the corporate level, andtherefore are included in the Corporate and Other group. The total assets of discontinued operations and therelated (loss) as well as the gain on disposition are not reÖected in the Corporate and Other group. Capitaladditions for each segment include capital expenditures for property, plant and equipment, additions tononconsolidated investments and additions to internal-use software.

Our existing segments reÖect certain managerial changes that were implemented during 2002. Thechanges primarily include the following: revenue previously recorded by the AT&T Business Services segment

20



as ""Internal revenue'' for services provided to certain other AT&T units and then eliminated within theCorporate and Other group is now recorded as a contra-expense by AT&T Business Services; the results ofcertain units previously included in the Corporate and Other group were transferred to the AT&T BusinessServices segment; the Ñnancial impacts of SFAS No. 133 that were previously recorded in the Corporate andOther group were transferred to the appropriate segments. In addition, AT&T Consumer Services and totalAT&T revenue was restated in accordance with Emerging Issues Task Force (EITF) issue 01-9, ""Accountingfor Consideration Given by a Vendor to a Customer,'' which requires cash incentives given to customerspreviously recorded as advertising and promotion expense now to be recorded as a reduction of revenue whenrecognized in the income statement, unless an identiÑable beneÑt is received in exchange. All prior periodshave been restated to reÖect these changes.

ReÖecting the dynamics of our business, we continuously review our management model and structure,which may result in additional adjustments to our operating segments in the future.

AT&T Business Services

AT&T Business Services oÅers a variety of global communications services to small and medium-sizedbusinesses, large domestic and multinational businesses and government agencies. Their services include longdistance, international, toll-free and local voice; data and IP services; managed services; and wholesaletransport services (sales of services to service resellers). Data and IP services are broad categories of servicesin which data (i.e. e-mail, video or computer Ñles) is transported from one location to another. In packetservices, data is divided into eÇciently sized components and transported between packet switches until itreaches its Ñnal destination, where it is reassembled. Packet services includes IP, frame relay and Asynchro-nous Transfer Mode or ""ATM.'' Managed services delivers end-to-end enterprise networking solutions bymanaging networks, servers and applications.


2002 2001 2000


External revenue

Services revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $25,856 $26,947 $27,900

Equipment and product salesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 379 317 236

Total external revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,235 27,264 28,136

Internal revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 323 441 423

Total revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $26,558 $27,705 $28,559

EBIT ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,638 $(2,305) $ 5,917

Capital additions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,716 5,451 6,841

At December 31,

2002 2001


Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $36,365 $40,316

Revenue

AT&T Business Services revenue decreased $1.1 billion, or 4.1%, in 2002 compared with 2001, anddecreased $0.9 billion, or 3.0% in 2001 compared with 2000. The declines were primarily driven by a decline in

21



long distance voice revenue of $1.7 billion in 2002 and $2.0 billion in 2001. Partially oÅsetting the decline wasgrowth in data/IP/managed services, including equipment sales, and local voice services of $0.7 billion in2002 and $1.3 billion in 2001.

In 2003, we expect long distance voice revenue will continue to decline, reÖecting continued competitivepressure as well as an accelerating shift in the retail/wholesale mix. We expect the declines in long distancevoice revenue will continue to be partially oÅset by growth in local and data/IP/managed services.

Long distance voice revenue declined approximately 12% in 2002 compared with 2001, and approxi-mately 13% in 2001 compared with 2000, reÖecting the continued impact of pricing pressures and a change inthe wholesale-retail product mix. While long distance volumes grew at a low single-digit rate in 2002 and2001, the increase was driven by growth in lower-priced wholesale volumes that was essentially oÅset by adecrease in higher-priced retail volumes. These factors are expected to continue to negatively impact revenuein 2003.

Data/IP/managed services, excluding equipment and product sales, increased approximately 5% in 2002compared with 2001. Growth was driven by increased sales in packet services, which grew at a rate ofapproximately 17%, partially oÅset by a decline in private line services (a service in which the connection isdedicated to the customer), reÖecting an industry trend of customers migrating from private line services tomore cost-eÅective and technologically-advanced packet services. When we include equipment and productsales, data/IP/managed services increased approximately 6%.

Data/IP/managed services increased approximately 13% in 2001 compared with 2000, with or withoutthe impact of equipment sales. The growth was led by packet services, which grew at a mid-20 percent rate.

Local voice services revenue grew approximately 13% in 2002 compared with 2001 and more than 20% in2001 compared with 2000. This growth reÖects our continued focus on increasing the utilization of our existingfootprint. AT&T added approximately 676,000 access lines in 2002. Access lines at the end of 2002 and 2001were approximately 3.6 million and 2.9 million, respectively.

AT&T Business Services internal revenue decreased $0.1 billion in 2002 compared with 2001 and wasrelatively Öat in 2001 compared with 2000. The impact of internal revenue is included in the revenue byproduct discussions, above. The decrease in internal revenue in 2002 compared with 2001 was primarily due tothe split-oÅ of AT&T Wireless on July 9, 2001, as these sales are now reported as external revenue, partiallyoÅset by an increase in sales to AT&T Broadband. Sales to AT&T Broadband were recorded as internalrevenue through the November 18, 2002, date of disposition. Subsequent to November 18, 2002, sales toAT&T Broadband, now Comcast, are recorded as external revenue.

EBIT

In 2002, EBIT increased $3.9 billion, or 171.1%, compared with 2001. The improvement was primarilydue to a decrease in pretax net losses related to equity investments of $3.5 billion for Concert and $2.6 billionfor AT&T Canada driven primarily by impairment charges and equity losses recorded in 2001, as well as$0.4 billion in lower restructuring charges recorded in 2002. This improvement was partially oÅset by adecrease in the long distance voice business resulting primarily from the impact of pricing pressures, a$1.0 billion impairment charge recorded in 2002 for AT&T Latin America, and a gain of approximately$0.5 billion recorded on the sale of our stake in Japan Telecom in 2001.

In 2001, EBIT decreased $8.2 billion, or 138.9%, compared with 2000. The decline was primarily due tohigher losses of $3.5 billion related to Concert and $3.0 billion related to AT&T Canada, primarily due toimpairment charges recorded in 2001. Also reÖected in the decline was the impact of long distance voicepricing pressure, as well as a shift from higher-margin long distance services to lower-margin growth services.

22



Other Items

Capital additions decreased $1.7 billion in 2002 compared with 2001 and $1.4 billion in 2001 comparedwith 2000 as we continue to maintain a disciplined focus on capital spending. Although these declines reÖectsigniÑcantly lower capital expenditures for network assets that support all services provided by AT&T, wecontinue to focus the majority of our capital spending on our data, IP and local voice products.

Total assets decreased $4.0 billion, or 9.8%, at December 31, 2002, compared with December 31, 2001.The decrease reÖects lower receivables primarily driven by the settlement of receivables from Concert inconnection with the Concert unwind, improved cash collections and lower revenue. The decrease also reÖectsthe write-oÅ of the assets associated with the impairment of AT&T Latin America.

AT&T Consumer Services

AT&T Consumer Services provides a variety of communications services to residential customersincluding domestic and international long distance; transaction-based long distance, such as operator-assistedservice and prepaid phone cards; local and local toll (intrastate calls outside the immediate local area); anddial-up Internet.


2002 2001 2000


Revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $11,527 $14,843 $18,643

EBIT ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,647 4,875 6,893

Capital additions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 127 140 148

At December 31,

2002 2001


Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,674 $ 2,141

Revenue

AT&T Consumer Services revenue declined $3.3 billion, or 22.3%, in 2002 compared with 2001, and$3.8 billion, or 20.4%, in 2001 compared with 2000. The decline in both periods was primarily due to longdistance revenue, which fell $3.6 billion in both 2002 and 2001. These declines were largely driven bytraditional long distance voice services, such as domestic and international dial services (long distance callswhere the number ""1'' is dialed before the call), and domestic calling card services. The traditional longdistance voice services revenue was negatively impacted by substitution and the impact of ongoing competi-tion, which has led to a loss of market share. In addition, the continued migration of customers to optionalcalling plans and lower-priced products, such as prepaid cards, has also negatively impacted revenue. Therevenue decline for 2001 also reÖects a $0.5 billion impact due to the elimination of per-line charges in July2000. Partially oÅsetting these declines was growth of $0.2 billion in both 2002 and 2001 related to localservices. Calling volumes declined at a low-teen percentage rate in 2002, and a low double-digit percentagerate in 2001 as a result of competition and wireless and Internet substitution, partially oÅset by an increase inprepaid card usage.

In 2002, approximately 5% of AT&T Consumer Services total revenue and more than 50% of prepaidcard revenue was related to a contract with Wal-Mart, Inc. If this contract is not renewed at the next renewaldate, January 31, 2004 (subject to early termination if certain events occur), AT&T Consumer Servicesrevenue would be adversely aÅected if we are unsuccessful in selling the cards through a diÅerent channel. We

23



expect product substitution, competition (including the continued entry of the Regional Bell OperatingCompanies (RBOCs) into the long distance market) and customer migration to lower-priced calling plansand products to continue to negatively impact AT&T Consumer Services revenue in 2003.

EBIT

EBIT declined $2.2 billion, or 45.7%, in 2002 compared with 2001 and declined $2.0 billion, or 29.3%, in2001 compared with 2000. The declines in both periods were primarily due to the revenue declines in the longdistance business. Also impacting the EBIT decline in 2002 was an asset impairment charge of $0.2 billionrecorded in 2002 related to the Digital Subscriber Line (DSL) assets that will no longer be utilized by AT&Tas a result of the agreement with Covad Communications to oÅer DSL services over their network.

EBIT margin declined to 23.0% in 2002 from 32.8% in 2001 and 37.0% in 2000. The declining EBITmargins primarily reÖect the impact of customers who substitute long distance calling with wireless andInternet service and remain AT&T Consumer Services customers as well as customers who migrate tooptional calling plans and lower-priced products. These customers generate less revenue, while their billing,customer care and Ñxed costs remain. The 2002 margin was also negatively impacted by the DSL assetimpairment charge. The 2001 margin decline was also impacted by a slight increase in marketing spendingtargeted at high-value customers, partially oÅset by the receipt of $0.2 billion in 2001 from the settlement ofdisputes relating to obligations resulting from the sale of AT&T Universal Card Services to Citigroup in 1998.

Other Items

In 2002, capital additions decreased $13 million, or 9.2%, compared with 2001. In 2001, capital additionsdecreased $8 million, or 5.2%, compared with 2000.

Total assets declined $0.5 billion to $1.7 billion at December 31, 2002, compared with $2.1 billion atDecember 31, 2001. This decline was primarily due to lower accounts receivable, reÖecting lower revenue andslightly improved cash collections.

Corporate and Other

This group primarily reÖects the results of corporate staÅ functions and the elimination of transactionsbetween segments.


2002 2001 2000


Revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (258) $ (351) $ (352)

EBIT ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (399) (1,063) 1,163

Capital additions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 63 150 1,594

At December 31,

2002 2001


Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $17,233 $19,872

Revenue

In 2002, Corporate and Other revenue was negative $258 million, compared with negative $351 million in2001. The year-over-year change was primarily due to lower internal revenue with AT&T Wireless due to itssplit-oÅ on July 9, 2001, partially oÅset by an increase in internal revenue with AT&T Broadband. In 2003, as

24



a result of the AT&T Broadband spin-oÅ, the elimination of internal revenue residing in Corporate and Otherwill decline signiÑcantly.

Revenue for Corporate and Other was essentially Öat in 2001 compared with 2000, as lower internalrevenue from AT&T Wireless due to its split-oÅ in 2001 was oÅset by increased sales from AT&T BusinessServices to AT&T Broadband.

EBIT

In 2002, EBIT improved $0.7 billion to a deÑcit of $0.4 billion. The improvement was largely due tolower investment impairment charges of approximately $1.4 billion, primarily related to our investments inNet2Phone and Time Warner Telecom in 2001. Also contributing to the EBIT improvement was lowerbusiness restructuring charges as well as lower transaction costs associated with AT&T's restructuringannounced in October of 2000, totaling $0.6 billion. These EBIT improvements were partially oÅset by lowernet gains of $0.7 billion driven by a $0.5 billion tax-free gain recorded in 2001 associated with the disposal of aportion of AT&T's retained interest in AT&T Wireless. Also oÅsetting the EBIT improvements were a lowerpension credit (income) of $0.3 billion primarily driven by a lower long-term expected rate of return and theeÅects of lower actual plan assets, a $0.2 billion impairment charge recorded in 2002 of certain leases ofaircraft which are accounted for as leveraged leases, and a $0.2 billion variance due to mark-to-marketadjustments on derivative instruments.

EBIT declined $2.2 billion to a deÑcit of $1.1 billion in 2001 compared with 2000. The decline waslargely due to $1.5 billion of greater investment impairment charges in 2001, primarily for Net2Phone andTime Warner Telecom. Also contributing to the decline were higher restructuring and other charges andhigher transaction costs associated with AT&T's restructuring announced in October 2000, totaling $0.4 bil-lion; and a lower pension credit (income) and higher postretirement expense of $0.3 billion. These declineswere partially oÅset by the $0.5 billion gain associated with the disposal of a portion of AT&T's retainedinterest in AT&T Wireless.

Other Items

Capital additions decreased $87 million in 2002 primarily due to a decline in the purchase of investments.Capital additions decreased $1.4 billion in 2001 primarily as a result of our investment in Net2Phone in 2000.

Total assets decreased $2.6 billion, to $17.2 billion in 2002. The decrease was primarily driven by a lowercash balance at December 31, 2002, and a decrease in investments primarily due to mark-to-marketadjustments, partially oÅset by derivative-related activity.

Financial Condition

At December 31,

2002 2001


Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $55,272 $165,481

Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42,960 105,778

Total shareowners' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,312 51,680

Total assets decreased $110.2 billion, or 66.6%, to $55.3 billion at December 31, 2002, compared withDecember 31, 2001. The November 18, 2002, spin-oÅ of AT&T Broadband accounted for $103.2 billion of thedecrease. The decrease also reÖects lower receivables of $3.1 billion primarily driven by improved cashcollections, the settlement of receivables from Concert in connection with the Concert unwind, and lower

25



revenue. In addition, assets decreased as a result of a $2.7 billion reduction in cash and the write-oÅ of$1.1 billion of assets associated with the impairment of our interest in AT&T Latin America.

Total liabilities decreased $62.8 billion, or 59.4%, to $43.0 billion at December 31, 2002, from$105.8 billion at December 31, 2001. The November 18, 2002, spin-oÅ of AT&T Broadband contributed$48.9 billion to the decrease. Also contributing to the decrease in liabilities was $11.6 billion in lower debtreÖecting the pay-down of short-term debt and AT&T Broadband's assumption of $3.5 billion of AT&T long-term debt in connection with its spin-oÅ. In addition, total liabilities decreased as a result of the settlement ofAT&T's obligation to purchase the publicly owned shares of AT&T Canada and due to the impairment of ourinterest in AT&T Latin America.

Minority interest of discontinued operations decreased $3.3 billion at December 31, 2002, compared withDecember 31, 2001. The decrease was a result of the exchange or redemption of all TCI PaciÑc preferredshares for AT&T common stock and the November 18, 2002, spin-oÅ of AT&T Broadband. Quarterly incomepreferred securities of discontinued operations decreased $4.7 billion at December 31, 2002, compared withDecember 31, 2001, as these securities were converted into Comcast class A common stock in conjunctionwith the spin-oÅ of AT&T Broadband.

Total shareowners' equity decreased $39.4 billion, or 76.2%, to $12.3 billion at December 31, 2002, from$51.7 billion at December 31, 2001. This decrease was primarily due to a decline of $26.6 billion in additionalpaid-in capital principally due to a $31.0 billion reduction resulting from the spin-oÅ of AT&T Broadband(including compensation expense triggered by the spin-oÅ), partially oÅset by an increase of $2.5 billion fromthe June 2002 common stock oÅering and $2.1 billion from the exchange or redemption of all TCI PaciÑcpreferred shares for AT&T common shares. Retained earnings decreased $13.1 billion at December 31, 2002,compared with December 31, 2001, primarily due to the net (loss) from discontinued operations partiallyoÅset by a $1.3 billion gain on the spin-oÅ of AT&T Broadband.

During 2002, when AT&T declared its quarterly dividends to the AT&T Common Stock Groupshareowners, the Company was in an accumulated deÑcit position. As a result, the Company reducedadditional paid-in capital by $0.6 billion, the entire amount of the dividends declared.

Liquidity

For the Years Ended December 31,Cash Flows2002 2001 2000


Provided by operating activities of continuing operationsÏÏÏÏÏÏÏÏ $10,483 $10,005 $10,641

(Used in) investing activities of continuing operationsÏÏÏÏÏÏÏÏÏÏ (1,429) (4,295) (32,678)

(Used in) provided by Ñnancing activities of continuingoperationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (6,041) (2,778) 23,745

(Used in) provided by discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5,679) 7,683 (2,746)

Net (decrease) increase in cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏ $(2,666) $10,615 $(1,038)

Net cash provided by operating activities of AT&T's continuing operations of $10.5 billion for the yearended December 31, 2002, was generated primarily by $11.4 billion of income from continuing operations,adjusted to exclude noncash income items and net gains on sales of businesses and investments, and a decreasein accounts receivable of $0.7 billion reÖecting cash collections and lower revenue. Partially oÅsetting thesesources of cash were a net change in other operating assets and liabilities of $1.4 billion due to lower taxliabilities as well as lower payroll and beneÑt-related liabilities.

26



Net cash provided by operating activities of continuing operations of $10.0 billion for the year endedDecember 31, 2001, primarily included $11.8 billion of income from continuing operations, adjusted toexclude noncash income items and net gains on sales of businesses and investments, and a decrease inaccounts receivable of $0.9 billion due to lower revenue and strong cash collections in December 2001.Partially oÅsetting the cash provided were net changes in other operating assets and liabilities of $2.1 billiondue to tax payments, and a decrease in accounts payable of $0.5 billion. Net cash provided by operatingactivities of continuing operations of $10.6 billion for the year ended December 31, 2000, primarily includedincome from continuing operations, excluding noncash income items and the adjustment for net gains on salesof businesses and investments, of $13.8 billion, partially oÅset by an increase in accounts receivable of$2.4 billion due to an increase in the receivables from Concert and slow customer collections at AT&TBusiness Services, a decrease in accounts payable of $0.6 billion and a net change in other assets and liabilitiesof $0.1 billion.

AT&T's investing activities resulted in a net use of cash of $1.4 billion in 2002, compared with$4.3 billion in 2001 and $32.7 billion in 2000. During 2002, AT&T spent $3.9 billion on capital expenditures,paid $3.4 billion to settle the AT&T Canada obligation and received a $5.8 billion cash distribution fromAT&T Broadband in conjunction with its spin-oÅ. In 2001, AT&T spent $5.8 billion on capital expenditures,and received approximately $1.6 billion from the sales of investments. During 2000, AT&T used approxi-mately $23.7 billion for acquisitions of businesses, primarily MediaOne Group, Inc., and spent $7.0 billion oncapital expenditures.

During 2002, net cash used in Ñnancing activities was $6.0 billion, compared with net cash used inÑnancing activities of $2.8 billion in 2001, and net cash provided by Ñnancing activities of $23.7 billion in 2000.During 2002, AT&T made net payments of $8.2 billion to reduce debt, paid dividends of $0.6 billion, andreceived $2.7 billion from the issuance of AT&T common stock, primarily due to the sale of 46 million sharesin the second quarter. The proceeds from this stock sale, along with funds from other short-term sources, wereused to satisfy AT&T's obligation to the AT&T Canada shareholders (see investing activities above).

During 2001, AT&T made net debt payments of $6.5 billion, paid AT&T Wireless $5.8 billion to settle anintercompany loan in conjunction with its split-oÅ from AT&T, and paid dividends of $0.5 billion. PartiallyoÅsetting these outÖows in 2001 was the receipt of $9.8 billion from the issuance of convertible preferred stockto NTT DoCoMo. During 2000, AT&T received $10.3 billion from the AT&T Wireless Group tracking stockoÅering and had net borrowings of debt of $17.0 billion. These sources of cash were partially oÅset by thepayment of $3.0 billion in dividends.

Working Capital and Other Sources of Liquidity

At December 31, 2002, our working capital ratio (current assets divided by current liabilities) was 1.32,reÖecting the cash balance on hand as a result of cash received in conjunction with the spin-oÅ of AT&TBroadband.

During the second and third quarters of 2002, AT&T renewed both its AT&T Business Services andAT&T Consumer Services customer accounts receivable securitization facilities. Together, the programsprovide up to $2.0 billion of available Ñnancing, limited by the eligible receivables balance, which varies frommonth to month. Proceeds from the securitization are recorded as a borrowing and included in short-termdebt. At December 31, 2002, approximately $0.2 billion was outstanding. The terms of these facilities havebeen extended to June (AT&T Business Services) and July (AT&T Consumer Services) of 2003.

At December 31, 2002, we had a $3.0 billion 364-day credit facility available to us that was entered intoon October 9, 2002. The credit facility contains a Ñnancial covenant that requires AT&T to meet a net debt-to-EBITDA ratio (as deÑned in the credit agreement) not exceeding 2.25 to 1.00 for four consecutive quarters

27



ending on the last day of each Ñscal quarter. It also contains a covenant that requires AT&T to maintain$1.27 billion in unencumbered cash, cash equivalents and marketable securities. At December 31, 2002, wewere in compliance with these covenants.

AT&T reduced its debt in 2002 as a result of the spin-oÅ of AT&T Broadband on November 18, 2002.The third party debt of TCI and MediaOne Group, Inc. of $15.0 billion was included in the net assets spun-oÅwith AT&T Broadband. This debt was included in the liabilities of discontinued operations at December 31,2001. At the time of spin-oÅ, AT&T and AT&T Broadband settled approximately $9.4 billion of intercom-pany debt and transaction-related costs. AT&T received a $5.8 billion cash distribution from AT&TBroadband, which is reÖected in the cash balance at December 31, 2002. The remainder of the intercompanydebt and transaction-related costs was settled via a debt exchange. In the AT&T Broadband debt exchange,$3.5 billion of outstanding AT&T notes were exchanged for notes that, upon completion of the spin-oÅ ofAT&T Broadband, became notes of AT&T Broadband and are unconditionally guaranteed by Comcast andcertain of its subsidiaries. In addition, AT&T completed another exchange in which $4.6 billion of outstandingAT&T notes were exchanged for new AT&T notes that remain solely obligations of AT&T and, uponcompletion of the spin-oÅ of AT&T Broadband, have revised terms, including revised maturity dates and/orinterest rates.

We anticipate funding our operations in 2003 primarily with cash and cash equivalents on hand as well ascash from operations. If economic conditions worsen or do not improve and/or competition and productsubstitution accelerate beyond current expectations, our cash Öow from operations would decrease, negativelyimpacting our liquidity. However, we believe our access to the capital markets is adequate to provide theÖexibility in funding our operations that we desire. Sources of liquidity include the commercial paper market,a $2.4 billion universal shelf registration, the securitization program and the credit facility. However, wecannot provide any assurances that all of these sources of funding will be available at the time they are neededor in the amounts required.

Credit Ratings and Related Debt Implications

During 2002, AT&T's long-term debt ratings were lowered by Moody's and Fitch. None of AT&T'sratings are currently under review or on Credit Watch for further downgrade. As of December 31, 2002, ourcredit ratings were as follows:

Short-Term Long-TermCredit Rating Agency Rating Rating Outlook

Standard & Poor's ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ A-2 BBB° Stable*

Moody's ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ P-2 Baa2 Negative

Fitch RatingsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-2 BBB° Stable*

* Subsequent to December 31, 2002, the Outlook was changed to ""Negative.''

Our access to the capital markets as well as the cost of our borrowings is aÅected by our debt ratings. In2002, as a result of the Moody's downgrade, the interest rate on $10.0 billion of notes sold in November 2001,increased by 50 basis points eÅective with interest payment periods that began after November 15, 2002, forthe majority of the notes. The additional interest expense in 2002 was approximately $8 million and isestimated to be an additional $50 million in 2003. Additional debt rating downgrades could require AT&T topay higher rates on certain existing debt, prepay certain operating leases and post cash collateral for certaininterest-rate and equity swaps if we are in a net payable position.

If our ratings were downgraded below investment grade by Standard & Poor's or Moody's, there areprovisions in our securitization programs, which could require the outstanding balances to be paid by thecollection of the receivables. We do not believe downgrades below investment grade are likely to occur.

28



The holders of certain private debt with an outstanding balance of $0.9 billion at December 31, 2002,have an annual put right to cause AT&T to repay the debt upon payment of an exercise fee. In exchange forthe debt holders agreeing not to exercise their put right, AT&T posted a cash-collateralized letter of credit in2002 totaling $0.4 billion and expiring March 2005. The annual put right for 2003 expired on February 13,2003, without exercise by the debt holders. The holders could accelerate repayment of the debt based oncertain events such as the occurrence of unfavorable local law or regulation changes in its country of operation.

If AT&T's debt ratings are further downgraded, AT&T's access to the capital market may be restrictedand/or such replacement Ñnancing may be more costly or have additional covenants than we had inconnection with our debt at December 31, 2002. In addition, the market environment for Ñnancing in general,and within the telecommunications sector in particular, has been adversely aÅected by economic conditionsand bankruptcies of other telecommunication providers. If the Ñnancial markets become more cautiousregarding the industry/ratings category we operate in, our ability to obtain Ñnancing would be further reduced.This could negatively impact our ability to pursue acquisitions, make capital expenditures to expand ournetwork or to pay dividends.

Cash Requirements

Our cash needs for 2003 will be primarily related to capital expenditures, repayment of debt and paymentof dividends. We expect our capital expenditures for 2003 to be approximately $3.3 billion to $3.5 billion. OnJanuary 31, 2003, we completed the repurchase, with cash, of $3.7 billion of notes with interest rates of 6.375%and 6.5% and maturities of 2004 and 2013. These notes were classiÑed as long-term debt at December 31,2002. In addition, in connection with the early retirement in February 2003, of exchangeable notes that areindexed to AT&T Wireless stock, we made cash payments of $152 million to the debt holders, funded in partby $72 million of proceeds from the sale of our remaining AT&T Wireless shares.

AT&T is not required to make cash contributions to its principle pension plans in 2003. However, basedon the Ñnal valuation of private equities and real estate for 2002, cash contributions could be required in 2004.

Contractual Cash Obligations

The following summarizes AT&T's contractual cash obligations and commercial commitments atDecember 31, 2002, and the eÅect such obligations are expected to have on liquidity and cash Öow in futureperiods.

Payments Due by Period

Less than 2-3 4-5 After 5Contractual Obligations Total 1 Year Years Years Years


Long-term debt, including currentmaturities(1),(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $19,988 $5,470 $2,368 $4,201 $7,949

Capital lease obligationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 101 4 17 7 73

Operating leases(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,124 480 729 455 460

Unconditional purchase obligations(4),(5),(6),(7) 674 268 291 115 Ì

Total Contractual Cash Obligations ÏÏÏÏÏÏÏÏÏ $22,887 $6,222 $3,405 $4,778 $8,482

(1) We had long-term debt that was indexed to securities (monetized debt). The total balance of monetized debt of $519 million at

December 31, 2002, had scheduled maturity dates of 2005 and 2006. However, in February 2003, we redeemed those notes with a

combination of shares and cash of $152 million. The portion of debt that was settled in shares is excluded from the above table and the

cash payments were included in ""Less than 1 Year'' in the above table.

29



(2) We had long-term debt, with original maturity dates of 2004 and 2013, with a carrying value of $3.7 billion at December 31, 2002.

This debt was settled in the Ñrst quarter of 2003 and included in ""Less than 1 Year'' in the above table. In connection with the

settlement of this debt, we paid premiums of $124 million, which are excluded from the above table.(3) Under certain real estate operating leases, we could be required to make payments to the lessors of up to $447 million at the end of the

lease term (lease terms range from 2004 through 2007). The actual amount paid, if any, would be reduced by amounts received by the

lessor upon remarketing of the property. These amounts are excluded from the above table due to the uncertainty of the dollar

amounts to be paid, if any, as well as the timing of such amounts.(4) AT&T Consumer Services has unconditional purchase obligations with multiple vendors to purchase a broad range of products and

services, including the outsourcing of billing and customer care services, and the purchase of certain promotional items. Such

obligations extend through 2005.(5) AT&T has contractual obligations to utilize network facilities from local exchange carriers with terms greater than one year. Since the

contracts have no minimum volume requirements, and are based on an interrelationship of volumes and discounted rates, we assessed

our minimum commitment based on penalties to exit the contracts, assuming we exited the contracts on December 31, 2002. At

December 31, 2002, the penalties AT&T would have incurred to exit all of these contracts would have been $2.1 billion. These

amounts are excluded from the above table due to the uncertainty of the dollar amounts to be paid, if any, as well as the timing of such

amounts.(6) AT&T has contractual obligations under two contracts that extend through 2006 for services that include computer application design,

development, maintenance and testing as well as the operation of data centers that host many of the computer applications operated

throughout AT&T. Payments under these contracts are based in part on the volume and type of services we require. Since AT&T can

terminate either or both of these contracts for convenience at any time by paying a fee, we assessed our minimum commitment based

on the termination for convenience fees, which decline each year during the term of the contracts. If we elect to exit both of these

contracts, the maximum termination fees we would be obligated to pay in the year of termination would be approximately $359 million

in 2003, $308 million in 2004, $239 million in 2005, or $164 million in 2006. These termination fees are excluded from the above table

due to the uncertainty of the dollar amounts to be paid, if any, as well as the timing of such amounts.(7) AT&T has contractual obligations that extend through 2009 for services that include payroll and related human resource services.

Payments under these contracts are based on level of service required and Öuctuates based on volume. Since there is no minimum

service requirement and we can exit the contract at any time by paying a termination fee, we assessed our minimum commitment

based on these termination fees, assuming we terminated the contracts on December 31 of each year. Such termination fees would be

approximately $50 million in 2003, $44 million in 2004, $38 million in 2005, $23 million in 2006, $11 million in 2007 or $3 million in

2008. These amounts are excluded from the above table due to the uncertainty of the dollar amounts to be paid, if any, as well as the

timing of such amounts.

From time to time, we guarantee the debt of our subsidiaries, and, in connection with the separation ofcertain subsidiaries, these guarantees remained and we issued guarantees for certain debt and otherobligations. These guarantees relate to our former subsidiaries AT&T Capital Corp., NCR, AT&T Wirelessand AT&T Broadband.

We currently hold no collateral for such guarantees, and have not recorded corresponding obligations. Wehave been provided with cross-guarantees or indemniÑcations by third parties for certain of these guarantees.In the event that the Ñnancial condition of the parties to the various agreements deteriorates to the point atwhich they declare bankruptcy, other third parties to the agreements could look to us for payment.

Commitments by Period

TotalAmounts Less than 2-3 4-5 After 5

Other Commercial Commitments Committed 1 Year Years Years Years


Guarantees of debt(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 506 $ Ì $ Ì $ Ì $506

Guarantees of other obligations(2),(3) ÏÏÏÏÏÏÏÏÏ 4,968 180 4,646 142 Ì

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,474 $180 $4,646 $142 $506

(1) Prior to the spin-oÅ of AT&T Broadband, we had guaranteed certain debt of AT&T Broadband, which we continue to provide. Under

the terms of the merger agreement between AT&T Broadband and Comcast, if Comcast does not call the debt in 2003, they must

provide us with a letter of credit in the amount of $500 million. In addition, Comcast has provided us with an indemniÑcation for this

debt.

30



(2) Prior to the spin-oÅ of AT&T Broadband, we had guaranteed various obligations of AT&T Broadband, including operating leases for

real estate, surety bonds, and equity hedges, which we continue to provide. Comcast has provided indemniÑcations for the full amount

of these guarantees.(3) AT&T provides a guarantee of an obligation that AT&T Wireless has to DoCoMo. In connection with an investment DoCoMo made

in AT&T Wireless, AT&T and AT&T Wireless agreed that under certain circumstances, including that AT&T Wireless fails to meet

speciÑc technological milestones by June 30, 2004 (revised to December 31, 2004, pursuant to an amended agreement between AT&T

Wireless and DoCoMo), DoCoMo would have the right to require AT&T Wireless to repurchase its AT&T Wireless common stock

for $9.8 billion plus interest. In the event AT&T Wireless is unable to satisfy its entire obligation, AT&T is secondarily liable for up to

$3.65 billion, plus interest.

Risk Management

We are exposed to market risk from changes in interest and foreign exchange rates, as well as changes inequity prices associated with previously aÇliated companies. In addition, we are exposed to market risk fromÖuctuations in the prices of securities, some of which we had monetized through the issuance of debt. On alimited basis, we use certain derivative Ñnancial instruments, including interest rate swaps, options, forwards,equity hedges and other derivative contracts, to manage these risks. We do not use Ñnancial instruments fortrading or speculative purposes. All Ñnancial instruments are used in accordance with board-approved policies.

We enter into foreign currency contracts to minimize our exposure to risk of adverse changes in currencyexchange rates. We are subject to foreign exchange risk for foreign-currency-denominated transactions, suchas debt issued, recognized payables and receivables and forecasted transactions. At December 31, 2002, ourforeign currency market exposures were principally Euros, Japanese yen, and Swiss francs.

The fair value of foreign exchange contracts is subject to the changes in foreign currency exchange rates.For the purpose of assessing speciÑc risks, we use a sensitivity analysis to determine the eÅects that marketrisk exposures may have on the fair value of our Ñnancial instruments and results of operations. To perform thesensitivity analysis, we assess the risk of loss in fair values from the eÅect of a hypothetical 10% adversechange in the value of foreign currencies, assuming no change in interest rates.

For foreign exchange contracts outstanding at December 31, 2002 and 2001, assuming a hypothetical10% appreciation of the U.S. dollar against foreign currencies from the prevailing foreign currency exchangerates, the fair value of the foreign exchange contracts would have decreased $66 million and $492 million,respectively. The decrease in the change from 200l was primarily due to a $5.3 billion decline in the notionalamount of contracts outstanding. This decline was largely due to debt under the Euro Commercial PaperProgram paid down in 2002, and the satisfaction of the obligation to purchase the outstanding shares of AT&TCanada in 2002. Because our foreign exchange contracts are entered into for hedging purposes, we believe thatthese losses would be largely oÅset by gains on the underlying transactions.

We have also entered into combined interest rate foreign currency contracts to hedge foreign-currency-denominated debt. At December 31, 2002 and 2001, assuming a hypothetical 10% appreciation in theU.S. dollar against foreign currencies from the prevailing foreign currency exchange rates, the fair value of thecombined interest rate foreign currency contracts would have decreased $0.5 billion and $0.4 billion,respectively. Because our foreign exchange contracts are entered into for hedging purposes, we believe thatthese losses would be largely oÅset by gains on the underlying foreign-currency-denominated debt.

The model to determine sensitivity assumes a parallel shift in all foreign currency exchange rates,although exchange rates rarely move in the same direction. Additionally, the amounts above do not necessarilyrepresent the actual changes in fair value we would incur under normal market conditions because allvariables, other than the exchange rates, are held constant in the calculations.

We use interest rate swaps to manage the impact of interest rate changes on earnings and cash Öows. Weperform a sensitivity analysis on our interest rate swaps to assess the risk of changes in fair value. The model to

31



determine sensitivity assumes a hypothetical 10% parallel shift in all interest rates. At December 31, 2002 and2001, assuming a hypothetical 10% decrease in interest rates, the fair value of interest rate swaps would havedecreased by $1 million and $2 million, respectively. We believe the decrease in fair value would be largelyoÅset by an increase in the fair value of the underlying hedged debt.

As discussed above, we have also entered into combined interest rate foreign currency contracts to hedgeforeign-currency-denominated debt. Assuming a hypothetical 10% increase in interest rates, the fair value ofthe contracts would have decreased by $3 million at December 31, 2002, and by a negligible amount atDecember 31, 2001.

The fair value of our Ñxed-rate long-term debt is sensitive to changes in interest rates. Interest ratechanges would result in gains or losses in the market value of the debt due to diÅerences between the marketinterest rates and rates at the inception of the obligation. Assuming a 10% downward shift in interest rates atDecember 31, 2002 and 2001, the fair value of unhedged debt would have increased by $0.7 billion and$1.0 billion, respectively.

At December 31, 2002, we had certain notes, with embedded derivatives, which were indexed to themarket price of equity securities we owned. Changes in the market prices of these securities resulted inchanges in the fair value of the derivatives. Assuming a hypothetical 10% increase in the market price of theseequity securities, the fair value of the collars would have decreased by $46 million and $112 million atDecember 31, 2002 and 2001, respectively. Because these collars hedged the underlying equity securitiesmonetized, we believed that the decrease in the fair value of the collars would have been largely oÅset byincreases in the fair value of the underlying equity securities. The changes in fair values referenced above donot represent the actual changes in fair value we would incur under normal market conditions because allvariables other than the equity prices were held constant in the calculations.

We use equity hedges to manage our exposure to changes in equity prices associated with various equityawards of previously aÇliated companies. Assuming a hypothetical 10% decrease in equity prices of thesecompanies, the fair value of the equity hedges (net liability) would have increased by $9 million atDecember 31, 2002, and by a negligible amount at December 31, 2001. Because these contracts are enteredinto for hedging purposes, we believe that the increase in fair value would be largely oÅset by decreases in theunderlying liabilities.

In order to determine the changes in fair value of our various Ñnancial instruments, including options,equity collars and other equity awards, we use certain Ñnancial modeling techniques, including Black-Scholes.We apply rate sensitivity changes directly to our interest rate swap transactions and forward rate sensitivity toour foreign currency forward contracts.

The changes in fair value, as discussed above, assume the occurrence of certain market conditions, whichcould have an adverse Ñnancial impact on the Company. They do not consider the potential eÅect of changesin market factors that would result in favorable impacts to us, and do not represent projected losses in fairvalue that we expect to incur. Future impacts would be based on actual developments in global Ñnancialmarkets. We do not foresee any signiÑcant changes in the strategies used to manage interest rate risk, foreigncurrency rate risk or equity price risk in the near future.

New Accounting Pronouncements

In August 2001, the FASB issued SFAS No. 143, ""Accounting for Asset Retirement Obligations.'' Thisstandard requires that obligations that are legally enforceable and unavoidable, and are associated with theretirement of tangible long-lived assets, be recorded as liabilities when those obligations are incurred, with theamount of the liability initially measured at fair value. The oÅset to the initial asset retirement obligation is anincrease in the carrying amount of the related long-lived asset. Over time, this liability is accreted to its future

32



value, and the asset is depreciated over the useful life of the related asset. Upon settlement of the liability, anentity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. SFASNo. 143 is eÅective for Ñnancial statements issued for Ñscal years beginning after June 15, 2002. For AT&T,this means that the standard was adopted on January 1, 2003. AT&T currently includes, in its groupdepreciation rates, an amount related to the retirement costs for certain assets. However, such amounts are notlegally enforceable or unavoidable; therefore, AT&T will be required to reverse the amount accrued inaccumulated depreciation. As of January 1, 2003, AT&T will report approximately $40 million as thecumulative eÅect of a change in accounting principles related to the adoption of SFAS No. 143. The impact ofno longer including the cost of removal in the group depreciation rates for these assets, coupled with thecumulative eÅect impact on accumulated depreciation, will result in a decrease to depreciation expense in2003. However, the costs incurred to remove these assets will be reÖected as a cost in the period incurred as""Costs of services and products.''

On June 28, 2002, the FASB issued SFAS No. 146, ""Accounting for Exit or Disposal Activities.'' Thisstatement addresses the recognition, measurement and reporting of costs that are associated with exit anddisposal activities. This statement includes the restructuring activities that are currently accounted forpursuant to the guidance set forth in EITF 94-3, ""Liability Recognition for Certain Employee TerminationBeneÑts and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring),'' costsrelated to terminating a contract that is not a capital lease and one-time beneÑt arrangements received byemployees who are involuntarily terminated Ì nullifying the guidance under EITF 94-3. UnderSFAS No. 146, the cost associated with an exit or disposal activity is recognized in the periods in which it isincurred rather than at the date the company committed to the exit plan. This statement is eÅective for exit ordisposal activities initiated after December 31, 2002, with earlier application encouraged. Previously issuedÑnancial statements will not be restated. The provisions of EITF 94-3 shall continue to apply for exit plansinitiated prior to the adoption of SFAS No. 146. Accordingly, the initial adoption of SFAS No. 146 will nothave an eÅect on AT&T's results of operations, Ñnancial position or cash Öows. Liabilities associated withfuture exit and disposal activities will not be recognized until actually incurred.

In December 2002, the FASB issued SFAS No. 148, ""Accounting for Stock-Based Compensation ÌTransition and Disclosure Ì an amendment of FASB Statement No. 123.'' This standard provides alternatemethods of transition for a voluntary change to the fair value method of accounting for stock-based employeecompensation and requires more prominent disclosure about the method used. This statement is eÅective forÑscal years ending after December 15, 2002. For AT&T, this means it is eÅective for December 31, 2002.Currently AT&T applies the disclosure-only provisions of SFAS No. 123, ""Accounting for Stock-BasedCompensation'' and we do not expense our stock options. However, as previously announced, AT&T will beginexpensing all stock options issued after January 1, 2003, and will continue to apply the disclosure-onlyprovisions to stock options issued prior to January 1, 2003. This method of transition is in compliance with theprovisions of SFAS No. 148. The adoption of the disclosure provisions of SFAS No. 148 will not have animpact on AT&T's results of operations, Ñnancial position or cash Öows; however, the expensing of the stockoptions issued after January 1, 2003, will have a negative impact on our results of operations. (See note 2 tothe Consolidated Financial Statements for the required disclosure under this standard.)

In November 2002, the FASB issued FASB Interpretation No. (FIN) 45, ""Guarantor's Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.'' FIN 45requires that an entity issuing a guarantee (including those embedded in a purchase or sales agreement) mustrecognize, at the inception of the guarantee, a liability equal to the fair value of the guarantee. The recordingof this liability is not dependent on the probability that the payments will be required. The oÅset to the liabilitywill depend on the circumstances under which the guarantee was issued, but could include: cash/accountsreceivable if it is a standalone transaction, net proceeds in a sales transaction, or expense if no compensation isreceived. FIN 45 also requires detailed information about each guarantee or group of guarantees even if the

33



likelihood of making a payment is remote. The disclosure requirements of this interpretation are eÅective forÑnancial statements of periods ending after December 15, 2002, which makes them eÅective for AT&T forDecember 31, 2002 (see note 9 to the Consolidated Financial Statements for the disclosures required underthis interpretation). The recognition and measurement provisions of this Interpretation are applicable on aprospective basis to guarantees issued or modiÑed after December 31, 2002. FIN 45 could have an impact onthe future results of AT&T depending on guarantees issued; however, at this time we do not believe that theadoption of this statement will have a material impact on our results of operations, Ñnancial position or cashÖows.

In January 2003, the FASB issued FIN 46, ""Consolidation of Variable Interest Entities Ì an Interpreta-tion of Accounting Research Bulletin (ARB) No. 51.'' FIN 46 requires the primary beneÑciary to consolidate avariable interest entity (VIE) if it has a variable interest that will absorb a majority of the entity's expectedlosses if they occur, receive a majority of the entity's expected residual returns if they occur, or both. FIN 46applies immediately to VIEs created after January 31, 2003, and to VIEs in which the entity obtains aninterest after that date. For VIEs acquired before February 1, 2003, the eÅective date for AT&T is July 1,2003. AT&T is currently in the process of determining the impact of this statement on its results of operations,Ñnancial position and cash Öows. The disclosures relating to our present involvement with possible VIEs andour maximum exposure to losses are included in note 18 to the Consolidated Financial Statements.

In November 2002, the EITF reached a consensus on EITF 00-21, ""Revenue Arrangements withMultiple Deliverables,'' related to the timing of revenue recognition for arrangements in which goods orservices or both are delivered separately in a bundled sales arrangement. The EITF requires that when thedeliverables included in this type of arrangement meet certain criteria they should be accounted for separatelyas separate units of accounting. This may result in a diÅerence in the timing of revenue recognition but will notresult in a change in the total amount of revenue recognized in a bundled sales arrangement. The allocation ofrevenue to the separate deliverables is based on the relative fair value of each item. If the fair value is notavailable for the delivered items then the residual method must be used. This method requires that the amountallocated to the undelivered items in the arrangement is their full fair value. This would result in the discount,if any, being allocated to the delivered items. This consensus is eÅective prospectively for arrangementsentered into in Ñscal periods beginning after June 15, 2003, which, for AT&T, is July 1, 2003. AT&T iscurrently evaluating the impact of this consensus on its results of operations, Ñnancial position and cash Öows.

In January 2003, the EITF reached a consensus on EITF 02-18, ""Accounting for Subsequent Investmentsin an Investee after Suspension of Equity Method Loss Recognition.'' This consensus states that if anadditional investment, in whole or in part, represents the funding of prior losses, the investor should recognizepreviously suspended losses. This determination would be based on various factors including whether theinvestment results in an increased ownership percentage, the fair value of the consideration received isequivalent to the consideration paid and whether the investment is acquired from a third party or directly froman investee. If any of these provisions are met, the additional investment would generally not be considered asfunding prior losses. When appropriate to recognize prior losses, the amount recognized would be limited tothe amount of the additional investment determined to represent the funding of prior losses. The consensuswill be eÅective for additional investments made after February 5, 2003.

Subsequent Events

In January 2003, AT&T early retired $3.7 billion of long-term notes. In February 2003, AT&T redeemedexchangeable notes that were indexed to AT&T Wireless common stock and subsequently sold its remainingAT&T Wireless holdings. For further information on these items, see the contractual cash obligations table inthe liquidity discussion.

34

REPORT OF MANAGEMENT

Management is responsible for the preparation, integrity and objectivity of the consolidated Ñnancialstatements and all other Ñnancial information included in this report. Management is also responsible formaintaining a system of internal controls as a fundamental requirement for the operational and Ñnancialintegrity of results. The Ñnancial statements, which reÖect the consolidated accounts of AT&T Corp. andsubsidiaries (AT&T) and other Ñnancial information shown, were prepared in conformity with generallyaccepted accounting principles. Estimates included in the Ñnancial statements were based on judgments ofqualiÑed personnel. To maintain its system of internal controls, management carefully selects key personneland establishes the organizational structure to provide an appropriate division of responsibility. We believe it isessential to conduct business aÅairs in accordance with the highest ethical standards as set forth in the AT&TCode of Conduct. These guidelines and other informational programs are designed and used to ensure thatpolicies, standards and managerial authorities are understood throughout the organization. Our internalauditors monitor compliance with the system of internal controls by means of an annual plan of internal audits.On an ongoing basis, the system of internal controls is reviewed, evaluated and revised as necessary in light ofthe results of constant management oversight, internal and independent audits, changes in AT&T's businessand other conditions. Management believes that the system of internal controls, taken as a whole, providesreasonable assurance that (1) Ñnancial records are adequate and can be relied upon to permit the preparationof Ñnancial statements in conformity with generally accepted accounting principles, and (2) access to assetsoccurs only in accordance with management's authorizations.

The Audit Committee of the Board of Directors, which is composed of directors who are not employees,meets periodically with management, the internal auditors and the independent accountants to review themanner in which these groups of individuals are performing their responsibilities and to carry out the AuditCommittee's oversight role with respect to auditing, internal controls and Ñnancial reporting matters.Periodically, both the internal auditors and the independent accountants meet privately with the AuditCommittee and have access to its individual members at any time.

The consolidated Ñnancial statements in this annual report have been audited by PricewaterhouseCoopersLLP, Independent Accountants. Their audits were conducted in accordance with generally accepted auditingstandards and include an assessment of the internal control structure and selective tests of transactions. Theirreport follows.

David W. Dorman Thomas W. HortonChairman of the Board, Senior Executive Vice President,Chief Executive OÇcer Chief Financial OÇcer

35

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareowners of AT&T Corp.:

In our opinion, based on our audits and the report of other auditors, the accompanying consolidatedbalance sheets and the related consolidated statements of operations, changes in shareowners' equity and ofcash Öows present fairly, in all material respects, the Ñnancial position of AT&T Corp. and its subsidiaries(AT&T) at December 31, 2002 and 2001, and the results of their operations and their cash Öows for each ofthe three years in the period ended December 31, 2002 in conformity with accounting principles generallyaccepted in the United States of America. These Ñnancial statements are the responsibility of AT&T'smanagement; our responsibility is to express an opinion on these Ñnancial statements based on our audits. Wedid not audit the Ñnancial statements for the year ended December 31, 2000 of Liberty Media Group, anequity method investee, which was acquired by AT&T on March 9, 1999. AT&T's Ñnancial statementsinclude equity method earnings of $1,488 million for the year ended December 31, 2000. Those statementswere audited by other auditors whose report thereon has been furnished to us, and our opinion expressedherein, insofar as it relates to the amounts included for Liberty Media Group, for the year endedDecember 31, 2000, is based solely on the report of the other auditors. We conducted our audits of thesestatements in accordance with auditing standards generally accepted in the United States of America, whichrequire that we plan and perform the audit to obtain reasonable assurance about whether the Ñnancialstatements are free of material misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the Ñnancial statements, assessing the accounting principles usedand signiÑcant estimates made by management, and evaluating the overall Ñnancial statement presentation.We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.

As discussed in the notes to the Ñnancial statements, AT&T was required to adopt Statement of FinancialAccounting Standards No. 142, Goodwill and Other Intangible Assets, eÅective January 1, 2002.

PRICEWATERHOUSECOOPERS LLP

New York, New YorkJanuary 23, 2003, except for Note 20,as to which the date is February 28, 2003

36


CONSOLIDATED STATEMENTS OF OPERATIONS


2002 2001 2000

Dollars in millions(except per share amounts)

Revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 37,827 $42,197 $46,850Operating ExpensesAccess and other connection ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,790 12,085 13,139Costs of services and products (excluding depreciation of $3,391, $2,954 and $3,119

included below)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,363 8,621 8,235Selling, general and administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,988 8,064 7,387Depreciation and amortizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,888 4,559 4,538Net restructuring and other charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,437 1,036 758

Total operating expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33,466 34,365 34,057

Operating income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,361 7,832 12,793Other (expense) income, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (77) 1,327 1,190Interest (expense)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,448) (1,493) (1,503)

Income from continuing operations before income taxes, minority interest income,and net (losses) earnings related to equity investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,836 7,666 12,480

(Provision) for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,587) (2,890) (4,487)Minority interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 114 131 41Equity (losses) earnings from Liberty Media Group ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (2,711) 1,488Net (losses) earnings related to other equity investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (400) (4,836) 10

Income (loss) from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 963 (2,640) 9,532Net (loss) from discontinued operations (net of income tax beneÑts of $6,014,

$3,715, and $1,364) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (14,513) (4,052) (4,863)Gain on disposition of discontinued operations (net of income tax beneÑt of $61 in

2002) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,324 13,503 Ì

(Loss) income before cumulative eÅect of accounting changes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (12,226) 6,811 4,669Cumulative eÅect of accounting changes (net of income taxes of $530 and $(578)) (856) 904 Ì

Net (loss) incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (13,082) 7,715 4,669Dividend requirements of preferred stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (652) ÌPremium on exchange of AT&T Wireless tracking stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (80) Ì

(Loss) income attributable to common shareowners ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(13,082) $ 6,983 $ 4,669

AT&T Common Stock Group Ì per basic share:Earnings (loss) from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.29 $ (0.91) $ 11.54(Loss) from discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (19.44) (5.60) (7.09)Gain on disposition of discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.77 18.53 ÌCumulative eÅect of accounting changes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1.15) 0.49 Ì

AT&T Common Stock Group (loss) earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (17.53) $ 12.51 $ 4.45

AT&T Common Stock Group Ì per diluted share:Earnings (loss) from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.26 $ (0.91) $ 11.01(Loss) from discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (18.95) (5.60) (6.76)Gain on disposition of discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.73 18.53 ÌCumulative eÅect of accounting changes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1.12) 0.49 Ì

AT&T Common Stock Group (loss) earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (17.08) $ 12.51 $ 4.25

AT&T Wireless Group Ì per basic and diluted share:Earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì $ 0.08 $ 0.21

Liberty Media Group Ì per basic and diluted share:(Loss) earnings Ì before cumulative eÅect of accounting changes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì $ (1.05) $ 0.58Cumulative eÅect of accounting changes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 0.21 Ì

Liberty Media Group (loss) earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì $ (0.84) $ 0.58

The notes are an integral part of the consolidated Ñnancial statements.

37


CONSOLIDATED BALANCE SHEETS

At December 31,

2002 2001

Dollars in millions

ASSETS

Cash and cash equivalentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 8,014 $ 10,680

Accounts receivable, less allowances of $669 and $754ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,286 7,153

Other receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 173 1,431

Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 910 1,192

Other current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,520 622

Current assets of discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1,649

TOTAL CURRENT ASSETS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,903 22,727

Property, plant and equipment, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25,604 26,803

Goodwill, net of accumulated amortization in 2001 of $564ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,626 5,314

Other purchased intangible assets, net of accumulated amortization of $244 and $190 ÏÏÏÏÏÏÏÏ 556 661

Prepaid pension costsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,596 3,329

Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,987 5,144

Non-current assets of discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 101,503

TOTAL ASSETS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 55,272 $165,481

LIABILITIES

Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,819 $ 4,156

Payroll and beneÑt-related liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,519 1,606

Debt maturing within one yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,762 10,134

Other current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,924 3,929

Current liabilities of discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 5,801

TOTAL CURRENT LIABILITIES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,024 25,626

Long-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18,812 24,025

Long-term beneÑt-related liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,001 3,459

Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,739 2,438

Other long-term liabilities and deferred credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,384 7,159

Non-current liabilities of discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 43,071

TOTAL LIABILITIES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42,960 105,778

Minority Interest of Discontinued OperationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 3,303

Company-Obligated Convertible Quarterly Income Preferred Securities of Subsidiary TrustHolding Solely Subordinated Debt Securities of AT&T of Discontinued Operations ÏÏÏÏÏÏÏÏ Ì 4,720

SHAREOWNERS' EQUITY

AT&T Common Stock, $1 par value, authorized 6,000,000,000 shares; issued and outstanding783,037,580 shares (net of 171,801,716 treasury shares) at December 31, 2002 and708,481,149 shares (net of 170,349,286 treasury shares) at December 31, 2001 ÏÏÏÏÏÏÏÏÏÏÏÏ 783 708

Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28,163 54,798

Accumulated deÑcit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (16,566) (3,484)

Accumulated other comprehensive loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (68) (342)

TOTAL SHAREOWNERS' EQUITY ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12,312 51,680

TOTAL LIABILITIES AND SHAREOWNERS' EQUITY ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 55,272 $165,481


38


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY


2002 2001 2000

Dollars in millions

AT&T Common StockBalance at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 708 $ 752 $ 639Shares issued (acquired), net:

Under employee plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 3 1For acquisitions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 9 121Settlement of put optionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 31 ÌFor exchange of AT&T Wireless tracking stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (74) ÌFor funding AT&T Canada obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 46 Ì ÌRedemption of TCI PaciÑc preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10 Ì ÌOther ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13 (13) (9)

Balance at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 783 708 752

AT&T Wireless Group Common StockBalance at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 362 ÌShares issued:

For stock oÅering ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 360Under employee plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 2 2For exchange of AT&T Wireless tracking stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 438 ÌConversion of preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 406 Ì

AT&T Wireless Group split-oÅÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (1,208) Ì

Balance at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 362

Liberty Media Group Class A Common StockBalance at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 2,364 2,314Shares issued (acquired), net:

For acquisitions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 62Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 14 (12)

Liberty Media Group split-oÅ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (2,378) Ì

Balance at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 2,364

Liberty Media Group Class B Common StockBalance at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 206 217Shares issued (acquired), net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 6 (11)Liberty Media Group split-oÅ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (212) ÌOther ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì

Balance at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 206

Additional Paid-In CapitalBalance at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 54,798 93,504 62,083Shares issued (acquired), net:

Under employee plans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 328 291 100For acquisitions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 862 23,583Settlement of put optionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 3,361 ÌFor funding AT&T Canada obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,485 Ì ÌRedemption of TCI PaciÑc preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,087 Ì ÌOther* ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31 (1,054) (2,804)

Proceeds in excess of par value from issuance of AT&T Wireless common stock Ì Ì 9,915Gain on issuance of common stock by aÇliates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 20 530Conversion of preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 9,631 ÌAT&T Wireless Group split-oÅÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (20,955) ÌLiberty Media Group split-oÅ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (30,768) Ì

(continued on next page)

39


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY (Continued)


2002 2001 2000

Dollars in millions

AT&T Broadband spin-oÅ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (31,032) Ì ÌExchange of AT&T Wireless tracking stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (284) ÌBeneÑcial conversion value of preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 295 ÌDividends declared Ì AT&T Common Stock GroupÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (569) (265) ÌOther ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35 160 97

Balance at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28,163 54,798 93,504

Guaranteed ESOP ObligationBalance at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (17)Amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 17

Balance at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì

(Accumulated DeÑcit)/Retained EarningsBalance at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,484) 7,408 6,712Net (loss) incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (13,082) 7,715 4,669Dividends declared Ì AT&T Common Stock GroupÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (275) (2,485)Dividends accrued Ì preferred stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (652) ÌPremium on exchange of AT&T Wireless tracking stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (80) ÌTreasury shares issued at less than cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (7) (1,488)AT&T Wireless Group split-oÅÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (17,593) Ì

Balance at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (16,566) (3,484) 7,408

Accumulated Other Comprehensive (Loss)Balance at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (342) (1,398) 6,979Other comprehensive income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 266 1,742 (8,377)AT&T Wireless Group split-oÅÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 72 ÌLiberty Media Group split-oÅ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (758) ÌAT&T Broadband spin-oÅ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8 Ì Ì

Balance at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (68) (342) (1,398)

Total Shareowners' Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 12,312 $ 51,680 $103,198

Summary of Total Comprehensive (Loss) Income:(Loss) income before cumulative eÅect of accounting changes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(12,226) $ 6,811 $ 4,669Cumulative eÅect of accounting changes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (856) 904 Ì

Net (loss) incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (13,082) 7,715 4,669Other comprehensive income (loss)®net of income taxes of $(169), $(1,119),

and $5,348© ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 266 1,742 (8,377)

Comprehensive (Loss) Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(12,816) $ 9,457 $ (3,708)

AT&T accounts for treasury stock as retired stock.

We have 100 million authorized shares of preferred stock at $1 par value.

* Other activity in 2001 and 2000 represents AT&T common stock received in exchange for entities owning certain cablesystems.


40


CONSOLIDATED STATEMENTS OF CASH FLOWS


2002 2001 2000

Dollars in millions

OPERATING ACTIVITIESNet (loss) income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(13,082) $ 7,715 $ 4,669Deduct:

Loss from discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (14,513) (4,052) (4,863)Gain on disposition of discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,324 13,503 ÌCumulative eÅect of accounting changes Ì net of income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (856) 904 Ì

Income (loss) from continuing operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 963 (2,640) 9,532Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities

of continuing operations:Net gains on sales of businesses and investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (30) (1,231) (734)Cost investment impairment charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 146 531 7Net restructuring and other chargesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,418 973 577Depreciation and amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,888 4,559 4,538Provision for uncollectible receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,058 884 925Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,631 (1,338) 1,005Net revaluation of certain Ñnancial instruments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8 (150) ÌMinority interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (114) (131) (41)Equity losses (earnings) from Liberty Media Group ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 2,711 (1,488)Net losses related to other equity investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 512 7,783 51Decrease (increase) in receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 707 888 (2,382)Decrease in accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (175) (508) (585)Net change in other operating assets and liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,400) (2,126) (148)Other adjustments, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (129) (200) (616)

NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS ÏÏÏÏÏÏÏÏÏ 10,483 10,005 10,641

INVESTING ACTIVITIESCapital expenditures and other additionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,878) (5,767) (7,025)Proceeds from sale or disposal of property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 468 73 555Increase in other receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (981)Investment distributions and sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10 1,585 414Investment contributions and purchases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2) (101) (1,787)Net dispositions (acquisitions) of businesses, net of cash disposed/acquired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (18) 15 (23,742)Decrease in AT&T Canada obligationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,449) Ì ÌProceeds from AT&T BroadbandÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,849 Ì ÌIncrease in restricted cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (442) Ì ÌOther investing activities, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33 (100) (112)

NET CASH USED IN INVESTING ACTIVITIES OF CONTINUING OPERATIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,429) (4,295) (32,678)

FINANCING ACTIVITIESProceeds from long-term debt issuances, net of issuance costsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 79 11,392 739Retirement of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,091) (725) (688)(Decrease) increase in short-term borrowings, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (7,157) (17,168) 16,973Repayment of borrowings from AT&T Wireless ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (5,803) ÌIssuance of convertible preferred securities and warrants ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 9,811 ÌIssuance of AT&T common shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,684 224 99Issuance of AT&T Wireless Group common shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 54 10,314Net issuance (acquisition) of treasury shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 24 (581)Dividends paid on common stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (555) (549) (3,047)Other Ñnancing activities, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1) (38) (64)

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES OF CONTINUINGOPERATIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (6,041) (2,778) 23,745

Net cash (used in) provided by discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5,679) 7,683 (2,746)Net (decrease) increase in cash and cash equivalentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,666) 10,615 (1,038)Cash and cash equivalents at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,680 65 1,103

Cash and cash equivalents at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 8,014 $ 10,680 $ 65


41


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. AT&T Restructuring and Discontinued Operations

In connection with the restructuring of AT&T Corp. (AT&T or the ""Company'') announced onOctober 25, 2000, AT&T Broadband, AT&T Wireless, and Liberty Media Group have all been separatedfrom AT&T.

AT&T Broadband, which was spun-oÅ from AT&T on November 18, 2002, was accounted for as adiscontinued operation pursuant to Statement of Financial Accounting Standards (SFAS) No. 144, ""Ac-counting for the Impairment or Disposal of Long-Lived Assets.'' In accordance with SFAS No. 144, priorperiod Ñnancial statements have been restated to reÖect AT&T Broadband as a discontinued operation in allperiods. AT&T Wireless, which was split-oÅ from AT&T on July 9, 2001, was accounted for as a discontinuedoperation pursuant to Accounting Principles Board (APB) Opinion No. 30, ""Reporting Results of Opera-tions Ì Reporting the EÅects of Disposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions.'' Since AT&T Wireless was separated in 2001, it wasreÖected as a discontinued operation in the prior year's Ñnancial statements. As discontinued operations, therevenue, costs and expenses and cash Öows of AT&T Broadband and AT&T Wireless have been excludedfrom the respective captions in the Consolidated Statements of Operations and Consolidated Statements ofCash Flows, and have been reported through their respective dates of separation as ""Net (loss) fromdiscontinued operations'' and as ""Net cash (used in) provided by discontinued operations.'' In addition, theassets and liabilities of AT&T Broadband have been excluded from the respective captions in the ConsolidatedBalance Sheet at December 31, 2001, and have been reported as ""Current assets of discontinued operations,''""Non-current assets of discontinued operations,'' ""Current liabilities of discontinued operations,'' ""Non-current liabilities of discontinued operations,'' ""Minority Interest of Discontinued Operations'' and ""Com-pany-Obligated Convertible Quarterly Income Preferred Securities of Subsidiary Trust Holding SolelySubordinated Debt Securities of AT&T of Discontinued Operations.''

AT&T Broadband

On November 18, 2002, AT&T spun-oÅ AT&T Broadband, which was comprised primarily of the AT&TBroadband segment, to AT&T shareowners. Simultaneously, AT&T Broadband combined with ComcastCorporation (Comcast) to form new Comcast. The combination was accomplished through a distribution ofstock to AT&T shareowners, who received 0.3235 (1.6175 adjusted for the 1-for-5 reverse stock split) of ashare of Comcast Class A common stock for each share of AT&T they owned at market close onNovember 15, 2002, the record date. The Internal Revenue Service (IRS) ruled that the transaction qualiÑedas tax-free for AT&T and its shareowners for U.S. federal income tax purposes, with the exception of cashreceived for fractional shares. Approximately 1.2 billion Comcast shares were issued to AT&T shareowners ata value of approximately $31.1 billion, based on the Comcast stock price on November 18, 2002. AT&Tshareowners received a 56% economic stake and a 66% voting interest in new Comcast.

In connection with the non-pro rata spin-oÅ of AT&T Broadband, AT&T wrote up the net assets ofAT&T Broadband to fair value. This resulted in a noncash gain of $1.3 billion, which represented thediÅerence between the fair value of the AT&T Broadband business at the date of the spin-oÅ and AT&T'sbook value in AT&T Broadband, net of certain charges triggered by the spin-oÅ and their related income taxeÅect. These charges included compensation expense due to the accelerated vesting of stock options as well asthe enhancement of certain incentive plans. The gain was recorded as a ""Gain on disposition of discontinuedoperations.''

Revenue for AT&T's Broadband business (which included At Home Corporation, or ""Excite@Home''through September 2001) was $8.9 billion, $10.1 billion and $8.4 billion for 2002, 2001 and 2000, respectively.Net (loss) from discontinued operations before income taxes was $(20.5) billion, $(8.1) billion, and$(7.1) billion for 2002, 2001, and 2000, respectively for the AT&T Broadband business. The loss for 2002

42


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

included pretax impairment charges of $16.5 billion ($11.8 billion after taxes) relating to goodwill andfranchise costs which was recorded in the second quarter of 2002.

Interest expense of $359 million, $333 million and $463 million was allocated to discontinued operationsin 2002, 2001 and 2000, respectively, based on the balance of intercompany debt between AT&T Broadbandand AT&T. At the time of the spin-oÅ of AT&T Broadband, this intercompany debt was settled via a$5.8 billion cash distribution from AT&T Broadband and the exchange of $3.5 billion of AT&T notes for notesof AT&T Broadband which are unconditionally guaranteed by Comcast and certain of its subsidiaries (seenote 8).

At December 31, 2001, current assets of $1.6 billion, non-current assets of $101.5 billion (including netgoodwill of $19.4 billion), current liabilities of $5.8 billion, non-current liabilities of $43.1 billion, minorityinterest of $3.3 billion, and company-obligated convertible quarterly income preferred securities of $4.7 billionwere attributable to the discontinued operations of the AT&T Broadband business. Current assets wereprimarily comprised of accounts receivable and investments, while non-current assets were primarilycomprised of goodwill, franchise costs and investments. Current liabilities were primarily comprised of short-term debt, accounts payable and payroll and beneÑt-related liabilities, while non-current liabilities wereprimarily comprised of long-term debt and deferred income taxes.

The noncash impacts of the spin-oÅ of AT&T Broadband include a reduction to assets of approximately$84.3 billion, a reduction to liabilities of approximately $48.8 billion, the reduction of minority interest of $1.2billion, the reduction of company-obligated convertible quarterly income preferred securities of subsidiarytrust of $4.7 billion, and a reduction to shareowners' equity of approximately $29.6 billion, including the$1.3 billion noncash gain on spin-oÅ.

AT&T Wireless

On April 27, 2000, AT&T created a new class of stock and completed a public stock oÅering of360 million shares, which represented 15.6% of AT&T Wireless Group tracking stock at a price of $29.50 pershare. This stock was intended to track the Ñnancial performance and economic value of AT&T's wirelessservices business. The net proceeds to AT&T, after deducting the underwriter's discount and related fees andexpenses, were $10.3 billion. AT&T allocated $7.0 billion of the net proceeds to AT&T Wireless Group, whichwas used for acquisitions, network expansion, capital expenditures and general corporate purposes. AT&Tutilized the remaining net proceeds of $3.3 billion for general corporate purposes.

On May 25, 2001, AT&T completed an exchange oÅer of AT&T common stock for AT&T Wirelessstock. Under the terms of the exchange oÅer, AT&T issued 1.176 shares (5.88 shares adjusted for the 1-for-5reverse stock split) of AT&T Wireless Group tracking stock in exchange for each share of AT&T commonstock validly tendered. A total of 372.2 million shares (74.4 million shares adjusted for the 1-for-5 reversestock split) of AT&T common stock were tendered in exchange for 437.7 million shares of AT&T WirelessGroup tracking stock. In conjunction with the exchange oÅer, AT&T recorded an $80 million premium as areduction to net income available to common shareowners. The premium represented the excess of the fairvalue of the AT&T Wireless Group tracking stock issued over the fair value of the AT&T common stockexchanged.

On July 9, 2001, AT&T completed the split-oÅ of AT&T Wireless as a separate, independently tradedcompany. All AT&T Wireless Group tracking stock was converted into AT&T Wireless common stock on aone-for-one basis, and 1,136 million shares of AT&T Wireless common stock held by AT&T were distributedto AT&T common shareowners on a basis of 0.3218 shares (1.609 shares adjusted for the 1-for-5 reverse stocksplit) of AT&T Wireless for each AT&T share outstanding. AT&T common shareowners received wholeshares of AT&T Wireless common stock and cash payments for fractional shares. The IRS ruled that thetransaction qualiÑed as tax-free for AT&T and its shareowners for U.S. federal income tax purposes, with the

43



exception of cash received for fractional shares. For accounting purposes, the deemed eÅective split-oÅ datewas June 30, 2001. The impact of operating results from July 1, 2001 through July 9, 2001, were deemedimmaterial to our consolidated results. The split-oÅ of AT&T Wireless resulted in a tax-free noncash gain of$13.5 billion, which represented the diÅerence between the fair value of the AT&T Wireless tracking stock atthe date of the split-oÅ and AT&T's book value in AT&T Wireless. This gain was recorded in 2001 as a ""Gainon disposition of discontinued operations.'' At the time of split-oÅ, AT&T retained approximately $3.0 billion,or 7.3%, of AT&T Wireless common stock, about half of which was used in a debt-for-equity exchange in July2001. The remaining portion of these holdings was monetized in October and December of 2001 through theissuance of debt that was exchangeable into AT&T Wireless shares (or their cash equivalent) at maturity (seenotes 7 and 8).

Revenue for AT&T Wireless was $6.6 billion for 2001 and $10.4 billion for 2000. Income fromdiscontinued operations before income taxes for AT&T Wireless was $308 million for 2001 and $844 millionfor 2000. Interest expense of $153 million and $330 million was allocated to AT&T Wireless discontinuedoperations in 2001 and 2000, respectively, based on the debt of AT&T that was attributable to AT&TWireless.

The noncash impacts of the split-oÅ of AT&T Wireless reÖect the split-oÅ of approximately $39.7 billionof net assets which included a $13.5 billion noncash gain.

Lucent Technologies Inc.

Net (loss) from discontinued operations for 2002 reÖects an estimated loss on a litigation settlementassociated with the business of Lucent Technologies Inc. (Lucent), which was spun-oÅ from AT&T in 1996.Sparks, et al. v. AT&T and Lucent Technologies Inc. et al., was a class action lawsuit Ñled in 1996 in Illinoisstate court. The complaint sought damages on behalf of present and former customers based on a claim thatthe AT&T Consumer Products business (which became part of Lucent in 1996) and Lucent had defraudedand misled customers who leased telephones, resulting in payments in excess of the cost to purchase thetelephones. AT&T and Lucent have denied any wrongdoing, but settled this matter to avoid the uncertaintyand expense of protracted litigation. On August 9, 2002, a settlement proposal was submitted to and acceptedby the court. In accordance with the separation and distribution agreement between AT&T and Lucent,AT&T's estimated proportionate share of the settlement and legal costs totaled $45 million pretax ($33 mil-lion after-tax), reÖecting a fourth quarter adjustment to the initial estimate. Depending upon the number ofclaims submitted and accepted, the actual cost of the settlement to AT&T may be less than stated amounts,but it is not possible to estimate the amount at this time. While similar consumer class actions are pending invarious state courts, the Illinois state court has held that the class it certiÑed covers claims in the other statecourt class actions.

Summary

Following is a summary of net (loss) from discontinued operations, net of income taxes:


2002 2001 2000


AT&T Broadband, net of income tax beneÑts of $6,002, $3,873and $1,671 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(14,480) $(4,202) $(5,399)

AT&T Wireless, net of income taxes of $(158) and $(307) ÏÏÏ Ì 150 536

Lucent Technologies Inc., net of income tax beneÑt of $12 ÏÏÏÏ (33) Ì Ì

Net (loss) from discontinued operations, net of income taxes ÏÏ $(14,513) $(4,052) $(4,863)

44



Liberty Media Corporation

As a result of our merger with Tele-Communications, Inc. (TCI) in 1999, we acquired Liberty MediaGroup (LMG). Although LMG was wholly owned, we accounted for it as an equity method investment sincewe did not have a controlling Ñnancial interest. On August 10, 2001, AT&T completed the split-oÅ of LibertyMedia Corporation (LMC) as an independent, publicly-traded company. AT&T redeemed each outstandingshare of Class A and Class B LMG tracking stock for one share of Liberty Media Corporation's Series A andSeries B common stock, respectively. The IRS ruled that the split-oÅ of Liberty Media Corporation qualiÑedas a tax-free transaction for AT&T, Liberty Media and their shareowners. The operating results of LMGthrough July 31, 2001, the deemed eÅective split-oÅ date for accounting purposes, were reÖected as ""Equity(losses) earnings from Liberty Media Group.'' The impact of the operating results from August 1 throughAugust 10, 2001, was deemed immaterial to our consolidated results. At the time of disposition, AT&T did notexit the line of business that Liberty Media Group operated in; therefore, at the time of its separation, LibertyMedia Group was not accounted for as a discontinued operation.

Upon split-oÅ, AT&T paid LMG $803 million pursuant to a tax-sharing agreement related to TCI netoperating losses generated prior to AT&T's merger with TCI. In addition, in 2002, AT&T receivedapproximately $114 million from LMG related to taxes pursuant to a tax-sharing agreement between LMGand AT&T Broadband, which existed prior to the TCI merger. At December 31, 2001, this receivable wasincluded in ""Accounts receivable.''

Summarized results of operations for LMG were as follows:

For the For theSeven Months Ended Year Ended

July 31, 2001 December 31, 2000


RevenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,190 $1,526

Operating (loss) income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (426) 436

(Loss) income from continuing operations beforecumulative eÅect of accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,711) 1,488

Cumulative eÅect of accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 545 Ì

Net (loss) income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,166) 1,488

2. Summary of SigniÑcant Accounting Policies

Consolidation

The consolidated Ñnancial statements include all controlled subsidiaries. All signiÑcant intercompanyaccounts and transactions have been eliminated in consolidation. Investments in majority-owned subsidiarieswhere control does not exist and investments in which we exercise signiÑcant inÖuence but do not control(generally a 20% to 50% ownership interest) are accounted for under the equity method of accounting.Investments in which there is no signiÑcant inÖuence (generally less than a 20% ownership interest) areaccounted for under the cost method of accounting.

Foreign Currency Translation

For operations outside the United States that prepare Ñnancial statements in currencies other than theU.S. dollar, we translate income statement amounts at average exchange rates for the year, and we translateassets and liabilities at year-end exchange rates. We present these translation adjustments as a component of""Accumulated other comprehensive loss'' within shareowners' equity. Gains and losses from foreign currencytransactions are included in results of operations.

45



Use of Estimates

The preparation of Ñnancial statements in conformity with generally accepted accounting principlesrequires management to make estimates and assumptions that aÅect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date of the Ñnancial statements, and revenueand expenses during the period reported. Actual results could diÅer from those estimates. Estimates are usedwhen accounting for certain items such as allowances for doubtful accounts, depreciation and amortization,employee beneÑt plans, taxes, restructuring reserves and contingencies.

Revenue Recognition

We recognize long distance, local voice and data services revenue based upon minutes of traÇc processedor contracted fee schedules. In addition, we record an estimated revenue reduction for adjustments tocustomer accounts. This estimate is based on a detailed analysis that compares accounts receivable aging atdiÅerent points in time to determine the appropriate level of adjustments. We recognize other products andservices revenue when the products are delivered and accepted by customers and when services are provided inaccordance with contract terms. For contracts where we provide customers with an indefeasible right to usenetwork capacity, we recognize revenue ratably over the stated life of the agreement.

Advertising and Promotional Costs

We expense costs of advertising and promotions as incurred. Advertising and promotional expenses were$814 million, $874 million and $801 million in 2002, 2001 and 2000, respectively.

Income Taxes

The provision for income taxes is based on reported income before income taxes. Deferred income taxesare provided for the eÅect of temporary diÅerences between the amounts of assets and liabilities recognized forÑnancial reporting purposes and the amounts recognized for income tax purposes. Deferred tax assets andliabilities are measured using currently enacted tax laws and the eÅects of any changes in income tax laws areincluded in the provision for income taxes in the period of enactment. Valuation allowances are recognized toreduce deferred tax assets when it is more likely than not that the asset will not be realized. In assessing thelikelihood of realization, we consider estimates of future taxable income, the character of income needed torealize future beneÑts and all available evidence. Investment tax credits are amortized as a reduction to theprovision for income taxes over the useful lives of the assets that produced the credits.

Cash Equivalents

We consider all highly liquid investments with original maturities of generally three months or less to becash equivalents.

Property, Plant and Equipment

We state property, plant and equipment at cost. Construction costs, labor and applicable overhead relatedto installations and interest during construction are capitalized. Costs of additions and substantial improve-ments to property, plant and equipment are capitalized. The costs of maintenance and repairs of property,plant and equipment are charged to operating expense. Depreciation is determined based upon the assets'estimated useful lives using either the group or unit method. The useful lives of communications and networkequipment range from three to 15 years. The useful lives of other equipment ranges from three to seven years.The useful lives of buildings and improvements range from 10 to 40 years. The group method is used for mostdepreciable assets, including the majority of communications and network equipment. The unit method isprimarily used for large computer systems, buildings and support assets. Under the group method, a speciÑc

46



asset group has an average life. A depreciation rate is developed based on the average useful life for thespeciÑc asset group. This method requires the periodic revision of depreciation rates. Under the unit method,assets are depreciated based on the useful life of the individual asset. When we sell or retire assets depreciatedusing the group method, the diÅerence between the proceeds, if any, and the cost of the asset is charged orcredited to accumulated depreciation, without recognition of a gain or loss. When we sell assets that weredepreciated using the unit method, we include the related gains or losses in ""Other (expense) income, net.''

Property, plant and equipment is reviewed for impairment annually, or whenever events or changes incircumstances indicate that the carrying value may not be recoverable. If the total of the expected futureundiscounted cash Öows is less than the carrying value of the asset, a loss is recognized for the diÅerencebetween the fair value and the carrying value of the asset.

We use accelerated depreciation methods for certain high-technology computer-processing equipmentand digital equipment used in the telecommunications network, except for switching equipment placed inservice before 1989, where a straight-line method is used. All other plant and equipment is depreciated on astraight-line basis.

Software Capitalization

Certain direct development costs associated with internal-use software are capitalized, including externaldirect costs of material and services, and payroll costs for employees devoting time to the software projects.These costs are included within ""Other assets'' and are amortized over a period not to exceed Ñve yearsbeginning when the asset is substantially ready for use. Costs incurred during the preliminary project stage, aswell as maintenance and training costs, are expensed as incurred. AT&T also capitalizes initial operating-system software costs and amortizes them over the life of the associated hardware.

AT&T also capitalizes costs associated with the development of application software incurred from thetime technological feasibility is established until the software is ready to provide service to customers. Thesecapitalized costs are included in property, plant and equipment and are amortized over a useful life not toexceed Ñve years.

Goodwill and Other Intangible Assets

Goodwill is the excess of the purchase price over the fair value of net assets acquired in businesscombinations accounted for under the purchase method. Beginning January 1, 2002, in accordance with SFASNo. 142, ""Goodwill and Other Intangible Assets,'' goodwill and indeÑnite-lived intangible assets are no longeramortized, but instead are tested for impairment at least annually (see note 3). Intangible assets that haveÑnite useful lives are amortized over their useful lives, which range from Ñve to 20 years.

Derivative Financial Instruments and Hedging Activities

We use derivative Ñnancial instruments to mitigate market risk from changes in interest rates, foreigncurrency exchange rates and equity prices. Derivative Ñnancial instruments may be exchange-traded orcontracted in the over-the-counter market and include swaps, options, warrants and forward contracts. We donot use derivative Ñnancial instruments for speculative purposes.

All derivatives are recognized on the balance sheet at fair value. Certain derivatives, at inception, aredesignated as hedges and evaluated for eÅectiveness at least quarterly throughout the hedge period. Thesederivatives are designated as either (1) a hedge of the fair value of a recognized asset or liability or of anunrecognized Ñrm commitment (fair value hedge), or (2) a hedge of a forecasted transaction or of thevariability of cash Öows to be received or paid related to a recognized asset or liability (cash Öow hedge). Allother derivatives are not formally designated for accounting purposes (undesignated). These derivatives,except for warrants, although undesignated for accounting purposes, are entered into to hedge economic risks.

47



We record changes in the fair value of fair-value hedges, along with the changes in the fair value of thehedged asset or liability that is attributable to the hedged risk (including losses or gains on Ñrm commit-ments), in ""Other (expense) income, net.''

We record changes in the fair value of cash-Öow hedges, along with the recognized asset or liability, in""Other comprehensive income (loss),'' net of income taxes, as a component of shareowners' equity, untilearnings are aÅected by the variability of cash Öows of the hedged transaction.

Changes in the fair value of undesignated derivatives are recorded in ""Other (expense) income, net,''along with the change in fair value of the underlying asset or liability.

We currently do not have any net investment hedges in a foreign operation.

We assess embedded derivatives to determine whether (1) the economic characteristics of the embeddedinstruments are not clearly and closely related to the economic characteristics of the remaining component ofthe Ñnancial instrument (the host instrument) and (2) whether a separate instrument with the same terms asthe embedded instrument would meet the deÑnition of a derivative instrument. When it is determined thatboth conditions exist, we designate the derivatives as described above, and recognize the derivative at fairvalue.

We formally document all relationships between hedging instruments and hedged items, as well as itsrisk-management objective and strategy for undertaking various hedge transactions. This process includeslinking all derivatives that are designated as fair value or cash Öow hedges to speciÑc assets and liabilities onthe balance sheet or to speciÑc Ñrm commitments or forecasted transactions.

We discontinue hedge accounting prospectively when (1) it is determined that the derivative is no longereÅective in oÅsetting changes in the fair value of cash Öows of a hedged item; (2) the derivative expires or issold, terminated, or exercised; (3) it is determined that the forecasted hedged transaction will no longer occur;(4) a hedged Ñrm commitment no longer meets the deÑnition of a Ñrm commitment, or (5) managementdetermines that the designation of the derivative as a hedge instrument is no longer appropriate.

When hedge accounting is discontinued, the derivative is adjusted for changes in fair value through""Other (expense) income, net.'' For fair value hedges, the underlying asset or liability will no longer beadjusted for changes in fair value and any asset or liability recorded in connection with a Ñrm commitment willbe removed from the balance sheet and recorded in current period earnings. For cash Öow hedges, gains andlosses that were accumulated in ""Other comprehensive income (loss)'' as a component of shareowners' equityin connection with a forecasted transaction, will be recognized immediately in ""Other (expense) income, net.''

Stock-Based Compensation

As of December 31, 2002, AT&T had a Long-Term Incentive Program and an Employee Stock PurchasePlan, which are described more fully in note 12. We apply APB Opinion No. 25, ""Accounting for Stock Issuedto Employees,'' and related interpretations in accounting for our plans. Accordingly, no compensation expensehas been recognized for our stock-based compensation plans other than for our performance-based andrestricted stock awards, stock appreciation rights (SARs), and certain occasions when we have modiÑed theterms of the stock option vesting schedule in conjunction with the 2001 split-oÅ of AT&T Wireless and the2002 spin-oÅ of AT&T Broadband.

AT&T has adopted the disclosure-only provisions of SFAS No. 123, ""Accounting for Stock-BasedCompensation.'' If AT&T had elected to recognize compensation costs based on the fair value at the date of

48



grant of the awards, consistent with the provisions of SFAS No. 123, net income and earnings per shareamounts would have been as follows:

AT&T Common Stock AT&T WirelessGroup Group

For the Years Ended December 31, 2002 2001 2000 2001 2000


Net (loss) income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(13,082) $9,114 $3,105 $ 35 $ 76

Add: Stock-based employee compensationincluded in reported net (loss) income, net oftaxÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 43 75 (156) Ì Ì

Deduct: Total stock-based employeecompensation expense determined under thefair value based method for all awards, net oftaxÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (345) (692) (324) (17) (25)

Pro forma net (loss) income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(13,384) $8,497 $2,625 $ 18 $ 51

Basic (loss) earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (17.53) $12.51 $ 4.45 $0.08 $0.21

Proforma basic (loss) earnings per shareÏÏÏÏÏÏÏ $ (17.93) $11.66 $ 3.77 $0.04 $0.14

Diluted (loss) earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (17.08) $12.51 $ 4.25 $0.08 $0.21

Proforma diluted (loss) earnings per share ÏÏÏÏÏ $ (17.47) $11.66 $ 3.60 $0.04 $0.14

The stock-based employee compensation (expense) income, net of tax, for AT&T Common Stock Groupincluded in income (loss) from continuing operations was $(55) million, $(71) million and $(7) million in2002, 2001 and 2000, respectively, and included in discontinued operations was $12 million, $(4) million and$163 million in 2002, 2001 and 2000, respectively. The amounts attributed to discontinued operations includedincome (expense), net of tax, of $51 million, $(2) million and $166 million in 2002, 2001 and 2000,respectively, related to grants of SARs of aÇliated companies held by certain employees subsequent to theTCI merger and prior to the AT&T Broadband spin-oÅ. In addition, we entered into an equity hedge in 1999to oÅset potential future compensation costs associated with these SARS. (Expense), net of tax, related tothis hedge was $(56) million, $(10) million, and $(200) million in 2002, 2001, and 2000, respectively.

Total stock-based employee compensation (expense), net of tax, determined under the fair value basedmethod for all awards related to continuing operations was $(288) million, $(562) million and $(315) millionfor 2002, 2001 and 2000, respectively, and related to discontinued operations was $(57) million, $(147) mil-lion and $(34) million for 2002, 2001 and 2000, respectively.

Pro forma earnings (loss) for AT&T Common Stock Group from continuing operations was $730 mil-lion, $(1,152) million and $7,736 million for 2002, 2001 and 2000, respectively, and from discontinuedoperations was $(14,582) million, $(4,213) million and $(5,111) million for 2002, 2001 and 2000,respectively.

Pro forma earnings (loss) for AT&T Common Stock Group per basic share from continuing operationswas $0.98, $(1.58) and $11.10 for 2002, 2001 and 2000, respectively, and from discontinued operations was$(19.53), $(5.78) and $(7.33) for 2002, 2001 and 2000, respectively.

Pro forma earnings (loss) for AT&T Common Stock Group per diluted share from continuing operationswas $0.96, $(1.58) and $10.59 for 2002, 2001 and 2000, respectively, and from discontinued operations was$(19.04), $(5.78) and $(6.99) for 2002, 2001 and 2000, respectively.

The pro forma eÅect on net loss from discontinued operations for AT&T Common Stock Group for 2002includes expense of $28 million due to the accelerated vesting of AT&T stock options held by AT&TBroadband employees at the date of spin-oÅ. The pro forma eÅect on net loss from discontinued operations for

49



AT&T Common Stock Group for 2001 includes expense of $10 million due to the conversion of AT&Tcommon stock options in connection with the split-oÅ of AT&T Wireless, and also includes expense of$12 million due to the accelerated vesting of AT&T Wireless stock options held by AT&T employees at thedate of the split-oÅ.

The pro forma eÅect on net loss from continuing operations available to common shareowners for 2001includes expense of $40 million due to the conversion of AT&T common stock options in connection with thesplit-oÅ of AT&T Wireless, and also includes expense of $163 million due to the accelerated vesting of AT&TWireless stock options held by AT&T employees at the date of split-oÅ.

Issuance of Common Stock by AÇliates

Changes in our proportionate share of the underlying equity of a subsidiary or equity method investee,which result from the issuance of additional equity securities by such entity, are recognized as increases ordecreases to additional paid-in capital in the Consolidated Statements of Shareowners' Equity.

Concentrations

As of December 31, 2002, other than the guarantee issued in connection with the split-oÅ of AT&TWireless (see note 9), we do not have any signiÑcant concentration of business transacted with a particularcustomer, supplier, lender or former aÇliate that could, if suddenly adversely impacted, severely impact ouroperations. We also do not have a concentration of available sources of labor, services or other rights thatcould, if suddenly eliminated, severely impact our operations. We invest our cash with many high-qualitycredit institutions.

ReclassiÑcations and Restatements

We reclassiÑed and restated certain amounts for previous years to conform to the 2002 presentation.

3. Impacts of Recently Adopted Accounting Pronouncements

SFAS No. 142, ""Goodwill and Other Intangible Assets''

EÅective January 1, 2002, AT&T adopted SFAS No. 142, ""Goodwill and Other Intangible Assets.''Upon adoption, goodwill was tested for impairment by comparing the fair value of our reporting units to theircarrying values. As of January 1, 2002, the fair value of the reporting units' goodwill exceeded their carryingvalue, and therefore no impairment loss was recognized. Franchise costs were tested for impairment as ofJanuary 1, 2002, by comparing the fair value to the carrying value (at the market level). An impairment lossof $856 million, net of taxes of $530 million, was recorded relating to the discontinued operation of AT&TBroadband in the Ñrst quarter of 2002. At December 31, 2002, this amount is included in the ""CumulativeeÅect of accounting changes'' in the Consolidated Statements of Operations.

50



The table below presents the impact of SFAS No. 142 on net (loss) income and (loss) earnings pershare, had the standard been in eÅect on January 1, 2000:

AT&T LibertyAT&T Common Stock Group Wireless Group Media Group

For the Years Ended December 31, 2002 2001 2000 2001 2000 2001 2000

(Dollars in millions, except per share amounts)

Net (loss) income:

Reported income (loss) from continuingoperations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 963 $ 71 $8,044 $ Ì $ Ì $(2,711) $1,488

Dividend requirements of preferred stockÏÏÏÏÏÏ Ì (652) Ì Ì Ì Ì Ì

Premium on exchange of AT&T Wirelesstracking stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (80) Ì Ì Ì Ì Ì

Reported income (loss) from continuingoperations available to common shareowners 963 (661) 8,044 Ì Ì (2,711) 1,488

Add back amortization, net of tax:

Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 175 149 Ì Ì 350 568

Equity method excess basis ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 37 37 Ì Ì 346 654

Franchise costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 4 8

Adjusted income (loss) from continuingoperations available to common shareowners 963 (449) 8,230 Ì Ì (2,011) 2,718

Reported (loss) income from discontinuedoperations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (14,513) (4,087) (4,939) 35 76 Ì Ì

Add back discontinued operations amortization,net of tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1,588 1,705 36 27 Ì Ì

Gain on disposition of discontinued operations 1,324 13,503 Ì Ì Ì Ì Ì

Cumulative eÅect of accounting changes ÏÏÏÏÏÏ (856) 359 Ì Ì Ì 545 Ì

Adjusted net (loss) income available tocommon shareowners ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(13,082) $10,914 $4,996 $ 71 $ 103 $(1,466) $2,718

Basic (loss) earnings per share:

Reported basic earnings (loss) per share fromcontinuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.29 $ (0.91) $11.54 $ Ì $ Ì $ (1.05) $ 0.58


Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 0.24 0.21 Ì Ì 0.14 0.22

Equity method excess basis ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 0.05 0.05 Ì Ì 0.13 0.25

Franchise costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì 0.01

Adjusted basic earnings (loss) per share fromcontinuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.29 (0.62) 11.80 Ì Ì (0.78) 1.06

Reported (loss) earnings from discontinuedoperations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (19.44) (5.60) (7.09) 0.08 0.21 Ì Ì

Add back discontinued operations amortization,net of tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 2.18 2.45 0.08 0.08 Ì Ì

Gain on disposition of discontinued operations 1.77 18.53 Ì Ì Ì Ì Ì

Cumulative eÅect of accounting changes ÏÏÏÏÏÏ (1.15) 0.49 Ì Ì Ì 0.21 Ì

Adjusted basic (loss) earnings per share ÏÏÏÏÏÏ $ (17.53) $ 14.98 $ 7.16 $0.16 $0.29 $ (0.57) $ 1.06

Diluted (loss) earnings per share:

Reported diluted earnings (loss) per share fromcontinuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.26 $ (0.91) $11.01 $ Ì $ Ì $ (1.05) $ 0.58

51



AT&T LibertyAT&T Common Stock Group Wireless Group Media Group


(Dollars in millions, except per share amounts)


Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 0.24 0.20 Ì Ì 0.14 0.22

Equity method excess basis ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 0.05 0.05 Ì Ì 0.13 0.25

Franchise costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì 0.01

Adjusted diluted earnings (loss) per share fromcontinuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.26 (0.62) 11.26 Ì Ì (0.78) 1.06

Reported (loss) earnings from discontinuedoperations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (18.95) (5.60) (6.76) 0.08 0.21 Ì Ì

Add back discontinued operations amortization,net of tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 2.18 2.34 0.08 0.08 Ì Ì

Gain on disposition of discontinued operations 1.73 18.53 Ì Ì Ì Ì Ì

Cumulative eÅect of accounting changes ÏÏÏÏÏÏ (1.12) 0.49 Ì Ì Ì 0.21 Ì

Adjusted diluted (loss) earnings per shareÏÏÏÏÏ $ (17.08) $ 14.98 $ 6.84 $0.16 $0.29 $ (0.57) $ 1.06

Emerging Issues Task Force (EITF) Issue 01-9, ""Accounting For Consideration Given by a Vendor to aCustomer''

During 2002, the Emerging Issues Task Force (EITF) reached a consensus on Issue 01-9, ""Accountingfor Consideration Given by a Vendor to a Customer,'' that cash incentives given to customers should becharacterized as a reduction of revenue when recognized in the income statement, unless an identiÑablebeneÑt is received in exchange. Prior to this consensus, cash incentives to acquire customers were recorded asadvertising and promotion expense within selling, general and administrative expenses. These cash incentivesare now recorded as a reduction of revenue and prior periods have been reclassiÑed to conform to thispresentation. The amounts reclassiÑed as a reduction of revenue for the years ended December 31, 2001 and2000, were $236 million and $250 million, respectively. Net income was not aÅected by this reclassiÑcation.

SFAS No. 144, ""Accounting for the Impairment or Disposal of Long-Lived Assets''

On January 1, 2002, AT&T adopted SFAS No. 144, ""Accounting for the Impairment or Disposal ofLong-Lived Assets,'' which supersedes SFAS No. 121, ""Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to Be Disposed Of.'' SFAS No. 144 applies to all long-lived assets, includingdiscontinued operations, and consequently amends APB Opinion No. 30. The initial adoption had no impacton AT&T's results of operations, Ñnancial position or cash Öows.

Adoption of SFAS No. 133, ""Accounting for Derivative Instruments and Hedging Activities''

EÅective January 1, 2001, AT&T adopted SFAS No. 133, ""Accounting for Derivative Instruments andHedging Activities'' and its corresponding amendments under SFAS No. 138, ""Accounting for CertainDerivative Instruments and Certain Hedging Activities.'' SFAS No. 133 establishes accounting and reportingstandards for derivative instruments, including certain derivative instruments embedded in other contracts andfor hedging activities. All derivatives, whether designated in hedging relationships or not, are required to berecorded on the balance sheet at fair value. The adoption of SFAS No. 133 on January 1, 2001, resulted in apretax cumulative-eÅect increase to income of $1,482 million ($904 million after-tax); $581 million($359 million after-tax) was attributable to AT&T Group (other than LMG), and $901 million ($545 millionafter-tax) was attributable to LMG.

AT&T Group's cumulative-eÅect increase to net income of $359 million was comprised of $130 millionrelated to continuing operations primarily attributable to warrants held in both public and private companies,

52



and $229 million related to discontinued operations primarily attributable to embedded and non-embedded netpurchase options related to indexed debt instruments.

Upon adoption, AT&T Group, as permitted by SFAS No. 133, reclassiÑed certain securities from""available-for-sale'' to ""trading.'' This reclassiÑcation resulted in the recognition, in earnings, of lossespreviously recorded within ""Accumulated other comprehensive loss.'' A portion of the loss ($1.6 billionpretax; $1.0 billion after-tax) was recorded as part of the cumulative eÅect of adoption. This loss completelyoÅset a gain on the indexed debt obligation that had been considered a hedge of Comcast, Microsoft andVodafone available-for-sale securities. The reclassiÑcation of securities also resulted in a pretax charge of$1.2 billion ($0.7 billion after-tax) recorded in ""Net (loss) from discontinued operations,'' in the Consoli-dated Statements of Operations.

LMG's cumulative-eÅect increase to income of $545 million was primarily attributable to separatelyrecording the embedded call option obligations associated with LMG's senior exchangeable debentures. Alsoincluded in the cumulative-eÅect was $87 million previously included in ""Accumulated other comprehensiveloss'' primarily related to changes in the fair value of LMG's warrants and options to purchase certainavailable-for-sale securities.

4. Supplementary Financial Information

For the Years EndedDecember 31,Supplementary Income Statement Information

2002 2001 2000


Included in Selling, General and Administrative Expenses:

Research and development expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 254 $ 274 $ 313

Other (Expense) Income, Net:

Aircraft leveraged-lease write-downs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(244) $ Ì $ Ì

Cost investment impairment chargesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (146) (531) (7)

Net revaluation of certain Ñnancial instrumentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (8) 150 Ì

Investment-related income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 116 285 435

Settlements associated with businesses disposed of ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 107 154 Ì

Net gains on sales of businesses and investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30 1,231 734

Miscellaneous, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 68 38 28

Total other (expense) income, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (77) $1,327 $1,190

At December 31,Supplementary Balance Sheet Information2002 2001


Property, Plant and Equipment:

Communications, network and other equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $48,169 $47,552

Buildings and improvementsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,129 7,969

Land and improvements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 327 370

Total property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56,625 55,891

Accumulated depreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31,021 29,088

Property, plant and equipment, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $25,604 $26,803

53



AT&T AT&TBusiness ConsumerServices Services Total


Goodwill:

Balance at December 31, 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,244 $70 $5,314

Write-oÅ of goodwill of AT&T Latin America ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (777) Ì (777)

Translation adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 91 Ì 91

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2) Ì (2)

Balance at December 31, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,556 $70 $4,626

GrossCarrying AccumulatedAmount Amortization Net


Intangible Assets:

Amortizable purchased intangible assets at December 31, 2002:

Customer lists and relationships ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $557 $132 $425

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 243 112 131

Total intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $800 $244 $556

The amortization expense associated with purchased intangible assets for the year ended December 31,2002, was approximately $83 million. Amortization expense for purchased intangible assets is estimated to beapproximately $65 million for the year ending December 31, 2003, $50 million for the year endingDecember 31, 2004, and $45 million for each of the years ending December 31, 2005, 2006, and 2007.

Leveraged Leases:

We lease to third parties airplanes, energy-producing facilities and transportation equipment underleveraged leases having original terms of 10 to 30 years, expiring in various years from 2004 through 2020. Theinvestment in leveraged leases is primarily included in ""Other assets.'' Following is a summary of ourinvestment in leveraged leases:

At December 31,

2002 2001


Rental receivables (net of nonrecourse debt*) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 476 $ 635

Estimated unguaranteed residual valuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 483 720

Unearned income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (211) (297)

Allowance for credit lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (23) (28)

Investment in leverage leases (included in ""Other assets'') ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 725 1,030

Deferred taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 932 1,063

Net investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(207) $ (33)

* The rental receivables are net of nonrecourse debt of $1.4 billion and $2.0 billion at December 31, 2002 and 2001, respectively.

54



For the Years Ended December 31,Supplementary Shareowners' Equity Information2002 2001 2000


Other Comprehensive Income (Loss):

Net foreign currency translation adjustment ®net of taxes of$(82), $160 and $181©(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 132 $ (250) $ (309)

Net revaluation of certain Ñnancial instruments:

Unrealized (losses) gains ®net of taxes of $340, $(343) and$4,686©(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (550) 475 (7,317)

Recognition of previously unrealized losses (gains) onavailable-for-sale securities ®net of taxes of $(539), $(950)and $480©(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 869 1,535 (750)

Net minimum pension liability adjustment (net of taxes of $112,$14 and $1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (185) (18) (1)

Total other comprehensive income (loss)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 266 $1,742 $(8,377)

(1) Includes LMG's foreign currency translation adjustments, net of taxes of $149 in 2001 through July 31, 2001, and $202 in 2000.

(2) Includes LMG's unrealized gains (losses) on available-for-sale securities, net of taxes of $(1,286) in 2001 through July 31, 2001, and

$6,117 in 2000.

(3) See below for a summary of the ""Recognition of previously unrealized losses (gains) on available-for-sale securities'' and the

Statement of Operations line items impacted.

Summary of Recognition of Previously Unrealized Losses (Gains) on Available-For-Sale Securities andthe Statement of Operations Line Items Impacted


2002 2001 2000

Pretax After-tax Pretax After-tax Pretax After-tax


AT&T GROUP:

Other (expense) income, net:

Other-than-temporary investment impairments $ 148 $ 91 $ 475 $ 293 $ Ì $ Ì

Other derivative activity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28 17 Ì Ì Ì Ì

Sales of various securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (238) (147) (433) (267)

Income from discontinued operations:

Other-than-temporary investment impairments 1,232 761 510 315 290 179

ReclassiÑcation of securities to ""trading'' inconjunction with the adoption of SFASNo. 133*ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 1,154 713 Ì Ì

Sales of various securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 555 343 (43) (27)

LIBERTY MEDIA GROUP:

Earnings (losses) from Liberty Media Group:

Sales of various securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 173 105 (1,044) (635)

Cumulative eÅect of accounting change*ÏÏÏÏÏÏ Ì Ì (144) (87) Ì Ì

Total recognition of previously unrealized losses(gains) on available-for-sale securities ÏÏÏÏÏÏÏÏ $1,408 $869 $2,485 $1,535 $(1,230) $(750)

* See note 3 for detailed discussion.

55



For the Years Ended December 31,Supplementary Cash Flow Information2002 2001 2000


Interest payments, net of capitalized interest of $61, $121 and$143 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,532 $1,537 $1,420

Income tax (receipts) payments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (814) 1,441 3,379

5. Earnings per Common Share and Potential Common Share

During 2001 and 2000, in addition to AT&T Common Stock, the AT&T Wireless Group and LibertyMedia Group tracking stocks were outstanding. The tracking stocks represented an interest in the economicperformance of the net assets of each of the respective groups. The earnings attributable to AT&T WirelessGroup and Liberty Media Group were excluded from the earnings attributable to the AT&T Common stockgroup. On July 9 and August 10, 2001, AT&T Wireless and Liberty Media Group, respectively, wereseparated from AT&T and the tracking stocks were redeemed (see note 1).

Income (loss) attributable to the diÅerent classes of AT&T common stock is as follows:

AT&T Common Stock AT&T Wireless Liberty MediaGroup Group Group


2002 2001 2000 2002 2001 2000 2002 2001 2000


Income (loss) from continuing operationsbefore cumulative eÅect of accountingchange ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 963 $ 71 $ 8,044 $Ì $Ì $Ì $Ì $(2,711) $1,488

Dividend requirements of preferred stock ÏÏÏ Ì (652) Ì Ì Ì Ì Ì Ì Ì

Premium on exchange of AT&T Wirelesstracking stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (80) Ì Ì Ì Ì Ì Ì Ì

Income (loss) from continuing operationsattributable to common shareowners ÏÏÏÏÏ 963 (661) 8,044 Ì Ì Ì Ì (2,711) 1,488

(Loss) income from discontinued operations (14,513) (4,087) (4,939) Ì 35 76 Ì Ì Ì

Gain on disposition of discontinuedoperations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,324 13,503 Ì Ì Ì Ì Ì Ì Ì

Cumulative eÅect of accounting changes ÏÏÏ (856) 359 Ì Ì Ì Ì Ì 545 Ì

Net (loss) income attributable to commonshareownersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(13,082) $ 9,114 $ 3,105 $Ì $35 $76 $Ì $(2,166) $1,488

AT&T Common Stock Group

On November 18, 2002, a 1-for-5 reverse stock split of AT&T common stock as approved by shareownerson July 10, 2002, was eÅected. Shares (except shares authorized) and per share amounts were restated toreÖect the stock split on a retroactive basis.

Basic earnings per common share (EPS) is computed by dividing income attributable to commonshareowners by the weighted-average number of common shares outstanding for the period. Diluted EPSreÖects the potential dilution (considering the combined income and share impact) that could occur ifsecurities or other contracts to issue common stock were exercised or converted into common stock. Thepotential issuance of common stock is assumed to occur at the beginning of the year, and the incrementalshares are included using the treasury stock method, which assumes the proceeds (after-tax) from exercise areused by the Company to purchase common stock at the average market price during the period. Theincremental shares (diÅerence between the shares assumed to be issued and the shares assumed to be

56



purchased), to the extent they would have been dilutive, are included in the denominator of the diluted EPScalculation.

A reconciliation of the share components for AT&T Common Stock Group basic to diluted EPScalculations is as follows:


2002(1) 2001(1),(2) 2000(1)

(Shares in millions)

Weighted-average common shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 746 729 697

EÅect of dilutive securities:

Stock optionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1 Ì 4

Preferred stock of subsidiary ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 Ì 8

Convertible quarterly income preferred securities ÏÏÏÏÏÏÏÏÏÏÏÏ 16 Ì 14

Excite@Home Put OptionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 8

Weighted-average common shares and potential common shares 766 729 731

(1) For 2002, 2001 and 2000, no adjustments were made to income for the computation of diluted EPS.

(2) As AT&T reported a loss from its continuing operations for 2001, the eÅects of including incremental shares are antidilutive;

therefore, both basic and diluted EPS reÖect the same calculation.

Preferred Stock of Subsidiary

Pursuant to the AT&T Broadband and Comcast merger agreement, AT&T was required to redeem theoutstanding TCI PaciÑc Communications, Inc. Class A Senior Cumulative Exchangeable Preferred Stock(TCI PaciÑc preferred stock) for AT&T common stock. All outstanding shares of TCI PaciÑc preferred stockwere either exchanged or redeemed for AT&T common stock during 2001 and 2002 (see note 10). AtDecember 31, 2001, the carrying value of TCI PaciÑc preferred stock was included in ""Minority Interest ofDiscontinued Operations.'' Dividends were included in ""Net (loss) from discontinued operations'' for 2002,2001 and 2000.

Convertible Quarterly Income Preferred Securities (Quarterly Preferred Securities)

On June 16, 1999, AT&T Finance Trust I, a wholly owned subsidiary of AT&T, completed the privatesale of 100 million shares of 5.0% cumulative quarterly income preferred securities (quarterly preferredsecurities) to Microsoft Corporation. Such securities were convertible into AT&T common stock. However, inconnection with the AT&T Broadband spin-oÅ (see note 1), Comcast assumed the quarterly preferredsecurities and Microsoft agreed to convert these preferred securities into shares of Comcast common stock. AtDecember 31, 2001, these securities were included in ""Company-Obligated Convertible Quarterly IncomePreferred Securities of Subsidiary Trust Holding Solely Subordinated Debt Securities of AT&T of Discontin-ued Operations.'' Dividends were included in ""Net (loss) from discontinued operations'' for 2002, 2001 and2000.

AT&T Wireless Group

Basic EPS from discontinued operations for AT&T Wireless Group for 2001 through June 30, 2001, thedeemed eÅective split-oÅ date for accounting purposes, and from April 27, 2000, the stock oÅering date,through December 31, 2000, was computed by dividing income attributable to AT&T Wireless Group by theweighted-average number of shares outstanding of AT&T Wireless Group of 438 million and 361 million,respectively.

57



Liberty Media Group

Basic (loss) earnings per share for LMG was computed by dividing (loss) income attributable to LMGby the weighted-average number of LMG shares outstanding of 2,582 million in 2001 through July 31, 2001,the deemed eÅective split-oÅ date for accounting purposes, and 2,572 million in 2000. Potentially dilutivesecurities, including Ñxed and nonvested performance awards and stock options, have not been factored intothe dilutive calculations because past history indicated that these contracts were generally settled in cash.

6. Net Restructuring and Other Charges

In 2002, net restructuring and other charges were $1,437 million which included a $1,029 million chargefor the impairment of the net assets of our consolidated subsidiary, AT&T Latin America. In December 2002,the AT&T Board of Directors approved a plan for AT&T to sell its approximate 95% voting stake in AT&TLatin America in its current condition. On December 31, 2002, we signed a non-binding term sheet for thesale of our shares within one year for a nominal amount. As a result of this plan, we classiÑed AT&T LatinAmerica as an asset held for sale at fair market value, in accordance with SFAS No. 144. Consequently, thereare approximately $160 million of assets (principally cash and accounts receivable) included in Other CurrentAssets and approximately $160 million of liabilities (principally secured short-term debt) included in OtherCurrent Liabilities. The $1,029 million charge to write the assets and liabilities down to their fair values wasreported within our AT&T Business Services segment.

Also included in net restructuring and other charges was a $204 million impairment charge related tocertain Digital Subscriber Line (DSL) assets (including internal-use software, licenses, and property, plant &equipment) that will not be utilized by AT&T as result of changes to our ""DSL build'' strategy. Instead ofbuilding DSL capabilities in all geographic areas initially targeted, we have signed an agreement with CovadCommunications to oÅer DSL services over their network. As a result, the assets in these areas were impaired.This charge was reported within our AT&T Consumer Services segment.

In 2002, AT&T recorded net business restructuring charges of $204 million. These activities consisted ofnew exit plans totaling $377 million and reversals of $173 million. The new plans primarily consisted of$334 million for employee separation costs ($28 million of which was recorded as a pension liability associatedwith management employees to be separated in 2002 which will be funded from the pension trust) and$39 million of facility closing reserves. Slightly more than 4,800 employees will be separated in conjunctionwith these exit plans, approximately one-half of which are management employees and one-half are non-management employees. The majority of these employee separations will be involuntary. Approximately 14%of the employees aÅected by these exit plans had left their positions by December 31, 2002, and we expectthose remaining to leave their positions by the end of 2003.

The $173 million reversal primarily consisted of $124 million of employee separation costs (approxi-mately $48 million of which was reversed from the pension liability) and $26 million related to prior planfacility closings that were deemed to be no longer necessary. The reversals were primarily due to manage-ment's determination that the restructuring plan established in the fourth quarter of 2001 for certain areas ofAT&T Business Services, including network services, needed to be modiÑed given current industry conditions,as well as the redeployment of certain employees to diÅerent functions within the Company.

58



The following table displays the activity and balances of the restructuring reserve account:

Type of Cost

Employee FacilitySeparations Closings Other Total


Balance at January 1, 2000ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 150 $ 239 $ 21 $ 410

AdditionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 442 2 62 506

Deductions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (350) (67) (47) (464)

Balance at December 31, 2000ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 242 174 36 452

AdditionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 474 166 12 652


Balance at December 31, 2001ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 486 304 19 809

AdditionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 306 78 Ì 384


Balance at December 31, 2002ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 379 $ 283 $ 3 $ 665

In addition to the new exit plans recorded during 2002, total additions for 2002 in the table above alsoincludes $39 million facility closing reserves recorded by Concert in 2001 and transferred to AT&T during2002 as part of the unwind of that joint venture.

Deductions reÖect cash payments of $366 million, $249 million and $410 million for 2000, 2001 and2002, respectively. These payments included cash termination beneÑts of $254 million, $202 million and$328 million, for 2000, 2001 and 2002, respectively, which were primarily funded through cash fromoperations. In 2000, 2001 and 2002, reserves of $98 million, $13 million and $9 million, respectively, weretransferred out of the restructuring liability to long-term liability accounts as a result of exiting managersdeferring severance payments, primarily related to executives. Also included in 2001 and 2002 deductions arereversals of prior business restructuring reserves of $33 million and $109 million, respectively. The businessrestructuring plans of 2000 and 2001 were substantially complete as of December 31, 2001 and 2002,respectively.

During 2001, net restructuring and other charges were $1,036 million which were primarily comprised of$862 million for employee separations, of which $388 million related to beneÑts to be paid from pension assetsas well as pension and postretirement curtailment losses, and $166 million for facility closings. These chargeswere slightly oÅset by the reversal of $33 million related to business restructuring plans announced in thefourth quarter 1999 and the Ñrst quarter 2000 (of which $15 million related to employee separations and$18 million related to contract terminations).

The charge covered separation costs for approximately 10,000 employees, approximately one-half ofwhom were management employees and one-half were non-management employees. More than 9,000 em-ployee separations related to involuntary terminations and the remaining 1,000 were voluntary.

During 2000, we recorded $758 million of net restructuring and other charges which included $586 mil-lion for employee separations, of which $144 million primarily related to pension and postretirementcurtailment losses, $91 million related to the government-mandated disposition of AT&T Communications(U.K.) Ltd., which would have competed directly with Concert and $62 million of network lease and othercontract termination costs associated with penalties incurred as part of notifying vendors of the termination ofthese contracts during the year.

59



The charge covered separation costs for approximately 6,100 employees, approximately one-half of whomwere management employees and one-half were non-management employees. Approximately 5,500 of theemployee separations were related to involuntary terminations and approximately 600 related to voluntaryterminations.

7. Investments

Equity Method Investments

We have investments in various companies and partnerships that are accounted for under the equitymethod of accounting and included within ""Other assets.'' Under the equity method, investments are stated atinitial cost, and are adjusted for subsequent contributions and our share of earnings, losses and distributions aswell as declines in value that are ""other than temporary.'' At December 31, 2002 and 2001, we had equityinvestments of $135 million and $313 million, respectively. Distributions from equity investments totaled$5 million, $25 million and $13 million for the years ended December 31, 2002, 2001 and 2000, respectively.

Summarized combined Ñnancial information for investments accounted for under the equity method thatwere signiÑcant to AT&T's Ñnancial results in 2001 is as follows:

Other EquityConcert(1) AT&T Canada Investments(2)



Revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6,189 $7,748 $ 947 $1,000 $1,001 $3,813 $11,751

Operating (loss) income ÏÏÏÏÏÏÏÏ (3,574) 329 (853) (226) (225) 86 542

(Loss) income from continuingoperations before extraordinaryitems & cumulative eÅect ofaccounting changes ÏÏÏÏÏÏÏÏÏÏÏ (3,609) 103 (1,247) (521) (351) (18) 307

Net (loss) income ÏÏÏÏÏÏÏÏÏÏÏÏÏ $(3,609) $ 103 $(2,220) $ (518) $ (351) $ (20) $ 260

At December 31, 2001 2002 2001 2001


Current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,744 $ 386 $ 391 $ 171

Non-current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,758 496 2,577 645

Current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,296 3,152 256 179

Non-current liabilitiesÏÏÏÏÏÏÏÏÏÏÏ 76 41 2,963 589

Redeemable preferred stockÏÏÏÏÏÏ Ì Ì Ì 7

Minority interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì

(1) The Concert joint venture was unwound in April 2002; therefore, Ñnancial information for 2002 is not applicable.

(2) AT&T did not have any individually signiÑcant equity investments in 2002 and on a combined basis such investments were not

signiÑcant to AT&T's 2002 Ñnancial results.

Concert

On April 1, 2002, Concert, our 50% owned joint venture with British Telecommunications plc (BT), wasoÇcially unwound and the venture's assets and customer accounts were distributed back to the parentcompanies, as agreed to in 2001. Under the partnership termination agreement, each of the partners generallyreclaimed the customer contracts and assets that were initially contributed to the joint venture, includinginternational transport facilities and gateway assets. In addition, AT&T assumed certain other assets that BToriginally contributed to the joint venture.

60



In 2001, the agreement to dissolve the Concert venture impacted AT&T's intent and ability to hold itsinvestment in Concert; therefore, AT&T recorded a $1.8 billion after-tax impairment charge ($2.9 billionpretax) included in ""Net (losses) related to other equity investments.'' The charge related to the diÅerencebetween the fair market value of the net assets AT&T was to receive in the transaction and the carrying valueof AT&T's investment in Concert. Certain items reserved for in 2001 were favorably settled resulting in a$60 million after-tax reversal in 2002, recorded within ""Net (losses) earnings related to other equityinvestments.''

AT&T Canada

At December 31, 2002, AT&T had an approximate 31% ownership interest in AT&T Canada. Pursuantto a 1999 merger agreement, AT&T had a commitment to purchase, or arrange for another entity to purchase,the publicly owned shares of AT&T Canada for the Back-end Price, which was the greater of the contractualÖoor price or the fair market value. The Öoor price accreted 4% each quarter, commencing on June 30, 2000.

In 2002 and 2001, AT&T recorded charges reÖecting the estimated loss on this commitment. Thecharges represented the diÅerence between the underlying value of the publicly owned AT&T Canada sharesand the price AT&T had committed to pay for them, including the 4% accretion of the Öoor price. After-taxcharges of $0.3 billion ($0.5 billion pretax) and $1.8 billion ($3.0 billion pretax) were recorded within ""Net(losses) related to other equity investments'' for 2002 and 2001, respectively. At December 31, 2001, thisliability of $3.0 billion was included in ""Other long-term liabilities and deferred credits.''

During 2002, AT&T arranged for third parties (Tricap Investment Corporation and CIBC CapitalPartners) to purchase the remaining 69% equity in AT&T Canada. As part of this agreement, AT&T agreedto fund the purchase price on behalf of the third parties. Tricap and CIBC Partners made a nominal paymentto AT&T upon completion of the transaction. Although AT&T held an approximate 31% ownership interest inAT&T Canada throughout 2002, it did not record equity earnings or losses since its investment balance waswritten down to zero largely through losses generated by AT&T Canada. Subsequent to December 31, 2002,AT&T entered into an agreement to dispose of its stake in AT&T Canada. In February 2003, pursuant to thatagreement, AT&T disposed of substantially all of its AT&T Canada shares.

Impairments Ì Equity Investments

Declines in value of equity method investments judged to be other-than-temporary are recorded in ""Net(losses) related to other equity investments.'' In 2002 and 2001, we recorded impairment charges on equitymethod investments of $0.3 billion after-tax ($0.5 billion pretax), and $4.3 billion after-tax ($7.0 billionpretax), respectively.

The 2002 charges primarily related to AT&T Canada and the 2001 charges primarily related to AT&TCanada and Concert, as discussed above. In addition, in 2001, we recorded an impairment charge on ourinvestment in Net2Phone, Inc. (Net2Phone) of $0.7 billion after-tax ($1.1 billion pretax). This chargeresulted from the deterioration of market valuations of Internet-related companies. In October 2001, AT&Tcontributed its investment in Net2Phone to NTOP Holdings, LLC (NTOP), and received ownership inNTOP. At December 31, 2001 AT&T retained an approximate 10% interest in NTOP, which was accountedfor as a cost method investment. It was subsequently sold in December 2002.

Cost Method Investments

At December 31, 2002 and 2001, we had cost method investments included in ""Other assets'' of$0.6 billion and $1.6 billion, respectively. Under the cost method, earnings are recognized only to the extentdistributions are received from the accumulated earnings of the investee. Distributions received in excess ofaccumulated earnings are recognized as a reduction of our investment balance. The Company's cost

61



investments are classiÑed as available-for-sale and are reported at fair value, with unrealized gains and losses,net of tax, recorded as a separate component of ""Other comprehensive income (loss)'' in shareowners' equity.At December 31, 2002 and 2001, approximately $0.5 billion and $1.3 billion, respectively, of these investmentswere indexed to certain long-term debt instruments (see note 8).

Impairments Ì Cost Investments

Declines in value of available-for-sale securities, judged to be other-than-temporary, are recorded in""Other (expense) income, net.'' During 2002 and 2001, we believed that certain investments would notrecover our cost basis in the foreseeable future given the signiÑcant decline in stock prices, the length of timethese investments had been below market, and industry speciÑc issues. Accordingly, we believed the declinesin value were other-than-temporary and, as a result, recorded investment impairment charges on suchsecurities of $0.1 billion after-tax ($0.1 billion pretax) and $0.3 billion after-tax ($0.5 billion pretax) for 2002and 2001, respectively, consisting primarily of charges related to Time Warner Telecom in both years. Inaddition, during 2002, we recorded a pretax impairment charge of $0.6 billion related to our holdings in AT&TWireless, which is monetized by debt indexed to the value of the AT&T Wireless shares (see note 8). Thedebt contains an embedded derivative that is designated as a cash Öow hedge. At the time we recognized theother-than-temporary decline in the value of AT&T Wireless as an expense, as permitted by SFAS No. 133,we also recognized, in earnings, the previously unrecognized gain on the embedded derivative of $0.6 billionpretax, resulting in no net income impact.

AT&T Wireless Group

On July 9, 2001, AT&T completed the split-oÅ of AT&T Wireless (see note 1). At that time, AT&Tretained an approximate 7.3% interest in AT&T Wireless common stock. In 2001, we recorded a $0.5 billiontax-free gain associated with the disposal of a portion of this ownership interest in a debt-for-equity exchangein ""Other (expense) income, net.''

In February 2003, AT&T redeemed exchangeable notes that were indexed to AT&T Wireless commonstock. The notes were settled with 78.6 million AT&T Wireless shares (see note 8). Subsequently, AT&T soldits remaining AT&T Wireless shares (approximately 12.2 million shares) for $72 million in cash, resulting in again of $22 million.

Japan Telecom Co. Ltd

On April 27, 2001, AT&T completed the sale of its 10% stake in Japan Telecom Co. Ltd to Vodafone for$1.35 billion in cash. The proceeds from the transaction were split evenly between AT&T and AT&T WirelessGroup since AT&T Wireless Group held approximately one-half of AT&T's investment. The transactionresulted in a pretax gain of approximately $0.5 billion recorded in ""Other (expense) income, net'' and a pretaxgain of approximately $0.5 billion recorded in ""Net (loss) from discontinued operations.''

62



8. Debt Obligations

Debt Maturing within One Year At December 31,

2002 2001


Commercial paper ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,091 $ 5,087

Short-term notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,086 3,970

Currently maturing long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,581 955

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4 122

Total debt maturing within one year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3,762 $10,134

Weighted-average interest rate of short-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.7% 5.0%

Securitizations

During 2002, AT&T renewed both its AT&T Business Services and AT&T Consumer Services customeraccounts receivable securitization facilities, the terms of which have been extended to June (AT&T BusinessServices) and July (AT&T Consumer Services) of 2003. Together, the 2002 programs provide up to$2.0 billion of available Ñnancing, limited by monthly eligible receivable balances, which vary from month tomonth. At December 31, 2002, the available Ñnancing was collateralized by $4.6 billion of accountsreceivable. Approximately $0.2 billion and $2.3 billion was outstanding at December 31, 2002 and 2001,respectively, and was included in ""Short-term notes'' in the table above. Under the program, accountsreceivable are sold on a discounted, revolving basis, to special-purpose, wholly-owned and fully consolidatedsubsidiaries of AT&T, which assign interests in such receivables to unrelated third-party Ñnancing entities.

Credit Facility

At December 31, 2002, we had a $3.0 billion 364-day credit facility available to us that was entered intoon October 9, 2002. The credit facility contains a Ñnancial covenant that requires AT&T to meet a net debt-to-EBITDA ratio (as deÑned in the credit agreement) not exceeding 2.25 to 1.00 for four consecutive quartersending on the last day of each Ñscal quarter. It also contains a covenant that requires AT&T to maintain$1.27 billion in unencumbered cash, cash equivalents and marketable securities. At December 31, 2002, wewere in compliance with these covenants.

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Long-Term DebtAt December 31,

Debentures and Notes 2002(1) 2001(1)

(Dollars in millions)Interest Rates(2) Maturities

4.59% - 6.00% 2004 - 2009 $ 1,455 $ 6,760

6.06% - 6.50% 2004 - 2029 6,678 4,960

6.75% - 7.50% 2004 - 2006 2,449 4,459

7.75% - 8.85% 2003 - 2031 6,796 5,328

9.90% - 19.95%(3) 2004 - 2004 13 21

Variable rate 2003 - 2054 3,012 3,440

Total debentures and notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,403 24,968

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 105 162

Unamortized discount, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (115) (150)

Total long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,393 24,980

Less: Currently maturing long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,581 955

Net long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $18,812 $24,025

(1) Debt amounts are included within the range of interest rates that are applied at each respective balance sheet date. See below for

discussion on interest rate changes that occurred during 2002.

(2) The actual interest paid on our debt obligations may have diÅered from the stated amount due to our entering into interest rate swap

contracts to manage our exposure to interest rate risk and our strategy to reduce Ñnance costs (see note 9).

(3) Interest rates greater than 10% are related to $8 million in bank loans held by AT&T Latin America in 2001. In 2002, AT&T Latin

America is classiÑed as an ""asset held for sale,'' and accordingly its associated liabilities, including debt, was recorded at fair value and

included in ""Other current liabilities'' at December 31, 2002 (see note 6).

The following table shows maturities at December 31, 2002, of the $20,393 million in total long-termobligations:

2003 2004 2005 2006 2007 Later Years


$1,581 $2,437 $1,185 $4,328 $296 $10,566

In connection with the spin-oÅ of AT&T Broadband, AT&T completed two debt exchanges. In theAT&T Broadband debt exchange, $3.5 billion of outstanding AT&T notes (with interest rates ranging from6.0% to 8.63%) were exchanged for notes that, upon completion of the spin-oÅ of AT&T Broadband, becamenotes of AT&T Broadband and are unconditionally guaranteed by Comcast and certain of its subsidiaries.

Also, $4.6 billion of outstanding long-term AT&T notes (with Ñxed interest rates ranging from 5.63% to8.0%, and maturities of 2004, 2025 and 2029) were exchanged for new AT&T notes (with Ñxed interest ratesranging from 6.38% to 8.6%, and maturities of 2004, 2013 and 2025) that upon completion of the spin-oÅ ofAT&T Broadband, have revised terms, including revised maturity dates and/or interest rates.

As a result of a long-term debt rating downgrade by Moody's, the interest rate on approximately$10.0 billion of notes (with interest rates ranging from 6.0% to 8.0%) sold in November 2001, increased by50 basis points eÅective with interest payment periods that begin after November 15, 2002, for the majority ofthe notes.

The holders of certain private debt with an outstanding balance of $0.9 billion at December 31, 2002,have an annual put right to cause AT&T to repay the debt upon payment of an exercise fee. In exchange forthe debt holders agreeing to not exercise their put right for 2002, AT&T posted a cash-collateralized letter of

64



credit in 2002, totaling $0.4 billion, and expiring in March, 2005. The $0.4 billion is considered restricted cashand is included in ""Other assets'' at December 31, 2002. The annual put right in 2003 expired on February 13,2003, without exercise by the debt holders. The debt holders could accelerate repayment of the debt based oncertain events such as the occurrence of unfavorable local law or regulation changes in its country of operation.

On January 31, 2003, AT&T completed the early retirement of approximately $1,152 million and$2,590 million long-term notes, with interest rates of 6.375% and 6.50%, due in March 2004 and March 2013,respectively. The notes were repurchased with cash and resulted in a loss of $178 million recorded in ""Other(expense) income, net'' in the Ñrst quarter of 2003.

Exchangeable Notes

During 2001, we issued long-term debt (exchangeable notes) that was indexed to AT&T Wirelesscommon stock and, at AT&T's option, was mandatorily redeemable with a number of shares of AT&TWireless common stock that was equal to the underlying shares multiplied by an exchange ratio, or its cashequivalent. The notes were accounted for as indexed debt instruments because the carrying value of the debtwas dependent upon the fair market value of the underlying securities. In addition, the notes containedembedded derivatives that required separate accounting. The economic characteristics of the embeddedderivatives (i.e. equity-like features) were not clearly and closely related to those of the host instruments (adebt security). As a result, the embedded derivatives were separated from the host debt instrument forvaluation purposes and were carried at fair value within the host debt instrument. The embedded derivativesfor these exchangeable notes were designated as cash Öow hedges. The options hedged the market risk of adecline in value of AT&T Wireless securities. The market risk of a decline in these securities, below therespective put prices, had been eliminated. In addition, any market gains we may have earned had beenlimited to the call prices. These designated options were carried at fair value with changes in fair valuerecorded, net of income taxes, within ""Accumulated other comprehensive loss'' as a component ofshareowners' equity. There was no ineÅectiveness recognized on the cash Öow hedges.

The shares of AT&T Wireless common stock were accounted for as ""available-for-sale'' securities underSFAS No. 115 with changes in the carrying value of the underlying securities that are not ""other-than-temporary'' being recorded as unrealized gains or losses, net of income taxes, within ""Other comprehensiveincome (loss)'' as a component of shareowners' equity. See note 7 for a discussion of impairments recorded in2002.

Following is a summary of the exchangeable notes outstanding at December 31, 2002:

Put Price Call Price CarryingMaturities Face Value Interest Rate Per Share Per Share Value

(Dollars in millions except per share amounts)

Indexed to 45.8 million shares of AT&T Wireless common stock:

2005 $220 LIBOR ° 0.4% $14.41 $18.87 $87

2006 220 LIBOR ° 0.4% 14.41 19.31 87

2006 220 LIBOR ° 0.4% 14.41 19.74 87

Indexed to 45 million shares of AT&T Wireless common stock:

2006 $204 LIBOR ° 0.4% $13.57 $19.03 $85

2006 201 LIBOR ° 0.4% 13.37 19.27 86

2006 204 LIBOR ° 0.4% 13.57 19.90 87

In February 2003, AT&T redeemed these exchangeable notes that had a carrying value of $652 million atthe time of settlement. The notes were settled with 78.6 million shares of AT&T Wireless common stock and

65



$152 million in cash. The settlement resulted in a pretax gain of approximately $176 million. The 12.2 millionremaining AT&T Wireless shares were subsequently sold (see note 7).

9. Financial Instruments

In the normal course of business, we use various Ñnancial instruments, including derivative Ñnancialinstruments, for purposes other than trading. These instruments include letters of credit, guarantees of debtand certain obligations of former aÇliates, interest rate swap agreements, foreign currency exchange contracts,option contracts, equity contracts and warrants. Collateral is generally not required for these types ofinstruments. However, as the requirements for collateral are generally dependent upon debt ratings andmarket conditions, AT&T may be required to post collateral for interest rate and equity swaps, as well asletters of credit in the future.

By their nature, all such instruments involve risk, including the credit risk of nonperformance by counter-parties, and our maximum potential loss may exceed the amount recognized in our balance sheet. However, atDecember 31, 2002 and 2001, in management's opinion, there was no signiÑcant risk of loss in the event ofnonperformance of the counter-parties to these Ñnancial instruments. We control our exposure to credit riskthrough credit approvals, credit limits and monitoring procedures. Other than the guarantee issued inconnection with the split-oÅ of AT&T Wireless, we do not have any signiÑcant exposure to any individualcustomer or counter-party, nor do we have any major concentration of credit risk related to any Ñnancialinstruments.

Letters of Credit

Letters of credit are purchased guarantees that ensure our performance or payment to third parties inaccordance with speciÑed terms and conditions. Management has determined that the Company's letters ofcredit do not create additional risk to AT&T.

The notional amounts outstanding at December 31, 2002 and 2001, were $923 million and $408 million,respectively. The letters of credit in eÅect at December 31, 2002, were collateralized by restricted cash of$496 million, of which $442 million was recorded in ""Other assets'' and $54 million was recorded in ""Othercurrent assets.'' The fair values of the letters of credit, based on the fees paid to obtain the obligations, wereimmaterial at December 31, 2002 and 2001.

Guarantees

From time to time, we guarantee the debt of our subsidiaries, and, in connection with the separation ofcertain subsidiaries, we issued guarantees for certain debt and other obligations of our former subsidiariesAT&T Capital Corp., NCR, AT&T Wireless and AT&T Broadband. We also issue indemniÑcations as part ofour software license agreements.

Total notional amounts of guaranteed debt at December 31, 2002 and 2001, were $506 million and$59 million, respectively. Prior to the spin-oÅ of AT&T Broadband, we had guaranteed certain debt of AT&TBroadband that matures in 2038. Such guarantee remained outstanding after the spin-oÅ of AT&T Broadbandand at December 31, 2002 totaled $500 million. Comcast has provided us with an indemniÑcation for this debtand, under the terms of the merger agreement between AT&T Broadband and Comcast, if Comcast does notcall the debt in 2003 they must provide us with a letter of credit in the amount of $500 million. The remainingguarantees for debt have expiration dates ranging from 2003 to 2020. Should the Ñnancial condition of debtors,including AT&T Broadband and Comcast, deteriorate to the point at which they are unable to meet theirobligations, third party creditors could look to us for payment. We currently hold no collateral for theseguarantees, and have not recorded corresponding obligations. At December 31, 2002 and 2001, there were noquoted market prices for similar agreements.

66



AT&T provides a guarantee of an obligation that AT&T Wireless has to NTT DoCoMo (DoCoMo).The amounts of the guarantee at December 31, 2002 and 2001, were $4.1 billion and $3.9 billion, respectively.On January 21, 2001, DoCoMo invested approximately $9.8 billion for shares of AT&T preferred stock thatwere converted into AT&T Wireless common stock in connection with the split-oÅ of AT&T Wireless. Of theinitial investment, AT&T retained approximately $3.6 billion, with the remainder of the proceeds allocated toAT&T Wireless. In connection with that investment, AT&T and AT&T Wireless agreed that, under certaincircumstances, including if AT&T Wireless fails to meet speciÑc technological milestones by June 30, 2004,DoCoMo would have the right to require AT&T Wireless to repurchase its AT&T Wireless common stock for$9.8 billion, plus interest. In the event AT&T Wireless is unable to satisfy the entire obligation, AT&T issecondarily liable for up to $3.65 billion, plus accrued interest. On December 26, 2002, AT&T Wireless andDoCoMo entered into an amendment to the original agreement which, among other things, extended thedeadline for compliance with the technological milestones to December 31, 2004. We currently hold nocollateral for this guarantee, and have not recorded a corresponding obligation. At December 31, 2002 and2001, there were no quoted market prices for similar agreements.

The total notional amount of other guaranteed obligations at December 31, 2002, was $458 million. Priorto the spin-oÅ of AT&T Broadband, we had guaranteed various obligations of AT&T Broadband. Inconnection with the spin-oÅ of AT&T Broadband, we continue to provide guarantees of these obligations,including operating leases for real estate, surety bonds, and equity hedges. These guarantees have expirationdates ranging from 2003 through 2007. Comcast has provided indemniÑcations for these guarantees of$458 million at December 31, 2002. Should the Ñnancial condition of AT&T Broadband and Comcastdeteriorate to the point at which they are unable to meet their obligations, third party creditors could look to usfor payment. We currently hold no collateral for these guarantees, and have not recorded correspondingobligations. At December 31, 2002, there were no quoted market prices for similar agreements.

The total notional amounts of software license indemniÑcations with a stated maximum liability, atDecember 31, 2002 and 2001, were approximately $50 million and $30 million, respectively. In addition, in afew instances, our liability is limited by the value of the licensing fees received or is not limited at all. Amountsrelated to these indemniÑcations cannot be estimated. The indemniÑcations generally have terms that coincidewith the software license which may be until terminated by the licensee. Under the terms of these agreements,we indemnify licensees against damages, expenses and losses arising from third party claims and proceedingsagainst trademark, copyright and/or patent infringement. We currently hold no collateral for these guaranteesand have not recorded corresponding obligations. At December 31, 2002, there were no quoted market pricesfor similar agreements.

Interest Rate Swap Agreements

We enter into interest rate swaps to manage our exposure to changes in interest rates. We enter into swapagreements to manage the Ñxed/Öoating mix of our debt portfolio in order to reduce aggregate risk to interestrate movements. Interest rate swaps also allow us to raise funds at Öoating rates and eÅectively swap them intoÑxed rates that are generally lower than those available to us if Ñxed-rate borrowings were made directly.These agreements involve the exchange of Öoating-rate for Ñxed-rate payments or the exchange of Ñxed-ratefor Öoating-rate payments without the exchange of the underlying principal amount. Floating-rate paymentsare tied to the LIBOR. We also designated certain interest-rate swaps as cash Öow hedges under SFASNo. 133, ""Accounting for Derivative Instruments and Hedging Activities.''

67



The following table indicates the types of swaps in use at December 31, 2002 and 2001, the respectivenotional amounts and their weighted-average interest rates. Average Öoating rates are those in eÅect at thereporting date, and may change signiÑcantly over the lives of the contracts:

At December 31,

2002 2001


Floating-rate to Ñxed-rate swaps Ì notional amountÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 190 $ 218

Weighted-average receive rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.81% 2.08%

Weighted-average pay rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.30% 7.31%

In addition, we have combined interest rate, foreign currency swap agreements for foreign-currency-denominated debt, which hedge our risk to both interest rate and currency movements. At December 31, 2002and 2001, the notional amounts related to these contracts was $3.8 billion, of which $3.1 billion was associatedwith our Euro bond oÅering in 2001.

The table below summarizes the fair and carrying values of the agreements. These swaps are valued usingcurrent market quotes, which were obtained from dealers.

2002 2001

Fair/Carrying Fair/CarryingValue Value

Asset Liability Asset Liability


Interest rate swap agreements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì $23 $Ì $18

Combined interest rate foreign currency swap agreementsÏÏÏÏ 660 Ì 18 26

Foreign Exchange

We enter into foreign currency forward contracts to manage our exposure to changes in currencyexchange rates related to foreign-currency-denominated transactions. Although we do not designate most ofour foreign exchange contracts as accounting hedges, we have certain contracts that are designated as foreigncurrency cash Öow hedges in accordance with SFAS No. 133. At December 31, 2002, our foreign exchangecontracts consisted principally of Euros, Japanese yen, and Swiss francs. At December 31, 2001, our foreignexchange contracts consisted principally of Canadian dollars (which related to our obligation to purchase theremaining shares of AT&T Canada), Euros, Japanese yen, Swiss francs, and Brazilian reais. In addition, weare subject to foreign exchange risk related to other foreign-currency-denominated transactions. The notionalamounts under contract at December 31, 2002 and 2001, were $742 million and $6.4 billion, respectively. Thedecrease from 200l was primarily due to approximately $5.3 billion in 2001 of foreign exchange contractsrelating to a Euro Commercial Paper Program and our obligation to purchase the outstanding AT&T Canadashares we did not own. A signiÑcant portion of our debt under the Euro Commercial Paper Program was paiddown in 2002, and our obligation to purchase the outstanding shares of AT&T Canada was satisÑed in 2002.The following table summarizes the fair and carrying values of the foreign exchange contracts at Decem-ber 31, 2002 and 2001. These foreign exchange contracts are valued using current market quotes which wereobtained from independent sources.

2002 2001

Fair/Carrying Fair/CarryingValue Value



Foreign exchange contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $41 $2 $72 $299

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Equity Option and Equity Swap Contracts

We enter into equity option and equity swap contracts, which are undesignated, to manage our exposureto changes in equity prices associated with various equity awards of previously aÇliated companies (seenote 12). The notional amounts outstanding on these contracts at December 31, 2002 and 2001, were$112 million and $19 million, respectively. The following table summarizes the carrying and fair values ofthese instruments at December 31, 2002 and 2001. Fair values are based on market quotes.

2002 2001

Carrying/Fair Carrying/FairValue Value



Equity hedges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $Ì $25 $Ì $15

Warrants

We may obtain warrants to purchase equity securities in private and public companies as a result ofcertain transactions. Private warrants and public warrants that provide for net share settlement (i.e. allow forcashless exercise) are considered to be derivative instruments and recognized on our balance sheet at fairvalue (in accordance with SFAS No. 133). Warrants are not eligible to be designated as hedging instrumentsbecause there is no underlying exposure. Instead, these are eÅectively investments in private and publiccompanies. The fair value of these warrants, as determined by using the Black-Scholes model, was $2 millionand $24 million at December 31, 2002 and 2001, respectively.

Debt Securities

The carrying value of debt with an original maturity of less than one year approximates market value. Thetable below summarizes the carrying and fair values of long-term debt (including currently maturing long-term debt), excluding capital leases, at December 31, 2002 and 2001. The fair values of long-term debt wereobtained based on quotes or rates available to us for debt with similar terms and maturities.

2002 2001

Carrying Value Fair Value Carrying Value Fair Value


Long-term debt, excluding capital leases ÏÏ $20,292 $21,030 $24,820 $24,704

Derivative Impacts

The following table summarizes the activity in ""Accumulated other comprehensive loss'' in Shareowners'equity related to derivatives designated as cash Öow hedges during the periods January 1, 2001 (date of thecompany's adoption of SFAS No. 133) through December 31, 2002. Unrealized amounts recorded within

69



""Accumulated other comprehensive loss'' prior to adoption of SFAS No. 133 were recognized in earnings inconjunction with the adoption of SFAS No. 133 ($1.6 billion pretax; $1.0 billion after-tax), (see note 3).

Pretax After-tax


Balance at January 1, 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì $ Ì

Unrealized gains (losses) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (480) (296)

Realized (gains) losses reclassiÑed into earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 85 52

Balance at December 31, 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (395) $ (244)

Unrealized gains (losses) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,747 1,078

Realized (gains) losses reclassiÑed into earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,259) (777)

Net amounts spun-oÅ with AT&T Broadband ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 317 196

Balance at December 31, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 410 $ 253

Included within the balance at December 31, 2002, were unrealized gains of $131 million pretax($81 million after-tax) on embedded derivatives related to exchangeable notes that were indexed to AT&TWireless common stock, which were settled in February 2003. The remaining balance of unrealized gains atDecember 31, 2002, was largely oÅset within ""Accumulated other comprehensive loss'' by unrealized losseson the underlying debt. Based upon the expiration or maturity dates of these remaining derivatives designatedas cash Öow hedges, we do not expect additional amounts to be transferred into earnings within the next year.

10. Equity Transactions

Pursuant to the AT&T Broadband and Comcast merger agreement, AT&T was required to redeem theoutstanding TCI PaciÑc Communications, Inc. Class A Senior Cumulative Exchangeable Preferred Stock forAT&T common stock. Each share of TCI PaciÑc preferred stock was exchangeable at the option of the holderfor 8.365 shares (1.673 adjusted for the 1-for-5 reverse stock split) of AT&T common stock. All outstandingshares (approximately 6.2 million) of TCI PaciÑc preferred stock with a carrying value of $2.1 billion atDecember 31, 2001 (included in Minority Interest of Discontinued Operations in the Consolidated BalanceSheet), were either exchanged or redeemed for approximately 51.8 million shares (10.4 million sharesadjusted for the 1-for-5 reverse stock split) of AT&T common stock. No gain or loss was recorded on theexchange/redemption of the TCI PaciÑc preferred stock.

During 2002, AT&T issued 14.7 million shares (2.9 million shares adjusted for the 1-for-5 reverse stocksplit) of AT&T common stock to certain current and former senior managers in settlement of their deferredcompensation accounts. Pursuant to AT&T's deferred compensation plan, senior managers may defer short-and long-term incentive compensation awards. The issuance of these shares resulted in an increase to totalshareowners' equity of $196 million.

In June 2002, AT&T completed a public equity oÅering of 230 million shares (46 million shares adjustedfor the 1-for-5 reverse stock split) of AT&T common stock for net proceeds of $2.5 billion. AT&T utilized theproceeds from the oÅering to satisfy a portion of its obligation to AT&T Canada common shareholders (seenote 7).

On January 22, 2001, NTT DoCoMo invested approximately $9.8 billion for 812,512 shares of a newclass of AT&T preferred stock with a par value of $1 per share. On July 9, 2001, in conjunction with the split-oÅ of AT&T Wireless Group, these preferred shares were converted into AT&T Wireless common stock.During 2001, we recorded dividend requirements on this preferred stock of $652 million. The preferred stockdividend represented interest in connection with the DoCoMo preferred stock as well as accretion of the

70



beneÑcial conversion feature associated with this preferred stock. The beneÑcial conversion feature wasrecorded upon the issuance of the preferred stock and represented the excess of the fair value of the preferredshares issued over the proceeds received.

11. Pension, Postretirement and Other Employee BeneÑt Plans

We sponsor noncontributory, deÑned beneÑt pension plans covering the majority of our employees.Pension beneÑts for management employees are based principally on career-average pay. Pension beneÑts foroccupational employees are not directly related to pay. Pension trust contributions are made to trust funds heldfor the sole beneÑt of plan participants. Our beneÑt plans for current and certain future retirees include health-care beneÑts, life insurance coverage and telephone concessions.

The following table shows the components of the net periodic beneÑt (credit) costs for continuingoperations included in our Consolidated Statements of Operations:

Pension BeneÑts Postretirement BeneÑts

For the Years Ended December 31, 2002 2001 2000 2002 2001 2000


Service cost Ì beneÑts earned during theperiod ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 209 $ 226 $ 239 $ 23 $ 26 $ 34

Interest cost on beneÑt obligations ÏÏÏÏÏÏÏÏÏÏ 1,002 938 983 365 344 351

Amortization of unrecognized prior servicecost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 152 172 174 12 4 4

Credit for expected return on plan assetsÏÏÏÏÏ (1,526) (1,647) (1,812) (187) (201) (230)

Amortization of transition assetÏÏÏÏÏÏÏÏÏÏÏÏÏ (34) (89) (156) Ì Ì Ì

Amortization of (gains) losses ÏÏÏÏÏÏÏÏÏÏÏÏÏ (22) (182) (332) 5 Ì (16)

Charges for special termination(credits) beneÑts*ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (19) 188 Ì Ì 28 16

Net curtailment losses (gains)* ÏÏÏÏÏÏÏÏÏÏÏÏ Ì 113 121 Ì 59 (14)

Net settlement losses* ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6 4 8 Ì Ì Ì

Net periodic beneÑt (credit) cost ÏÏÏÏÏÏÏÏÏÏÏ $ (232) $ (277) $ (775) $ 218 $ 260 $ 145

* Primarily included in ""Net restructuring and other charges'' in the Consolidated Statements of Operations.

In connection with our restructuring plan announced in the fourth quarter of 2001, we recorded a$188 million charge related to management employee separation beneÑts expected to be funded by assets ofthe AT&T Management Pension Plan as well as a $28 million charge related to expanded eligibility forpostretirement beneÑts for certain employees expected to exit under the plan. We also recorded pension andpostretirement beneÑt curtailment charges of $172 million.

71



The following tables provide a reconciliation of the changes in the plans' beneÑt obligations and fair valueof assets, and a statement of the funded status:

PostretirementPension BeneÑts BeneÑts

For the Years Ended December 31, 2002 2001 2002 2001


Change in beneÑt obligations:

BeneÑt obligation, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $13,878 $12,898 $ 5,277 $ 4,851

Service costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 209 226 23 26

Interest cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,002 938 365 344

Plan amendmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34 62 14 Ì

Actuarial losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,134 655 640 373

BeneÑt payments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,221) (1,072) (480) (406)

Special termination (credits) beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (19) 188 Ì 28

Settlements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (32) (17) Ì Ì

Curtailment losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì 61

BeneÑt obligation, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $14,985 $13,878 $ 5,839 $ 5,277

Change in fair value of plan assets:

Fair value of plan assets, beginning of year ÏÏÏÏÏÏÏÏÏ $18,449 $21,055 $ 2,156 $ 2,521

Actual return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,663) (1,576) (255) (214)

Employer contributions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 70 59 324 255

BeneÑt payments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,221) (1,072) (480) (406)

Settlements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (32) (17) Ì Ì

Fair value of plan assets, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $15,603 $18,449 $ 1,745 $ 2,156

At December 31:

Funded (unfunded) beneÑt obligationÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 618 $ 4,571 $(4,094) $(3,121)

Unrecognized net loss (gain) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,715 (2,624) 1,684 606

Unrecognized transition asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (34) Ì Ì

Unrecognized prior service cost (credits) ÏÏÏÏÏÏÏÏÏÏÏ 769 887 (10) (12)

Net amount recordedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,102 $ 2,800 $(2,420) $(2,527)

The AT&T Management Pension Plan had an unfunded accumulated beneÑt obligation of $1.1 billion asof December 31, 2002. The accumulated beneÑt obligation of $9.4 billion at December 31, 2002, was in excessof the fair value of the plan assets of $8.3 billion. Our nonqualiÑed pension plans had an unfundedaccumulated beneÑt obligation of $98 million and $113 million at December 31, 2002 and 2001, respectively.

The unfunded accumulated beneÑt obligation for the AT&T Management Pension Plan is attributedprimarily to the loss in value of the plan assets and the impact of the decline in the discount rate used to valuethe pension beneÑt obligations. As a result, due to the under-funded status of these plans, in 2002, theCompany recorded an additional minimum pension liability of $699 million. The oÅset to this liability was anintangible asset of $410 million and a charge to ""Other comprehensive income (loss)'' of $289 million($179 million, net of tax).

Our postretirement welfare beneÑt plans and telephone concession beneÑt plans had accumulatedpostretirement beneÑt obligations of $5.9 billion at December 31, 2002, which was in excess of plan assets of

72



$1.7 billion. Our postretirement welfare beneÑt plans and telephone concession beneÑt plans had accumulatedpostretirement beneÑt obligations of $5.3 billion at December 31, 2001, which was in excess of plan assets of$2.2 billion.

At December 31, 2002 and 2001, our pension plan assets included $13 million and $31 million of AT&Tcommon stock, respectively.

The following table provides the amounts recorded in our Consolidated Balance Sheets:

PostretirementPension BeneÑts BeneÑts

At December 31, 2002 2001 2002 2001


Prepaid pension cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,596 $3,329 $ Ì $ Ì

BeneÑt related liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,255) (591) (2,420) (2,527)

Intangible asset (in ""Other assets'') ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 456 46 Ì Ì

Accumulated other comprehensive incomeÏÏÏÏÏÏÏÏÏÏÏ 305 16 Ì Ì

Net amount recordedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,102 $2,800 $(2,420) $(2,527)

The assumptions in the following table were used in the measurement of the pension and postretirementbeneÑt obligations and the net periodic beneÑt costs, as applicable. These assumptions were reassessed as ofDecember 31, 2002. The discount rate was reduced to 6.5% based on current yields on high quality corporateÑxed-income investments with maturities corresponding to the expected duration of the beneÑt obligations.The expected long-term rate of return on plan assets was adjusted downward to 8.5% eÅective January 1, 2003,primarily in consideration of the current and projected investment portfolio mix and estimated long-terminvestment returns for each asset class. Additionally, the rate of projected compensation increases was reducedto 4.25% reÖecting expected inÖation levels, our actual recent experience and future outlook. Our previousyears' disclosed compensation rates have been restated to include the component of the assumed compensa-tion rate increase attributable to employee promotion.

Weighted-AverageAssumptions

At December 31, 2002 2001 2000

Discount rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.50% 7.25% 7.50%

Expected return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9.0% 9.5% 9.5%

Rate of compensation increase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.25% 5.9% 5.9%

We assumed a rate of increase in the per capita cost of covered health-care beneÑts (the health-care costtrend rate) of 10.9%. This rate was assumed to gradually decline after 2002 to 5.0% by 2010 and then remainlevel. Assumed health-care cost trend rates have a signiÑcant eÅect on the amounts reported for the health-care plans. A one percentage point increase or decrease in the assumed health-care cost trend rate wouldincrease or decrease the total of the service and interest-cost components of net periodic postretirementhealth-care beneÑt cost by $11 million and $10 million, respectively, and would increase or decrease thehealth-care component of the accumulated postretirement beneÑt obligation by $175 million and $152 million,respectively.

We also sponsor savings plans for the majority of our employees. The plans allow employees to contributea portion of their pretax and/or after-tax income in accordance with speciÑed guidelines. We match apercentage of the employee contributions up to certain limits. Contributions relating to continuing operationsamounted to $135 million in 2002, $131 million in 2001, and $206 million in 2000.

73



12. Stock-Based Compensation Plans

Under the 1997 Long-term Incentive Program (Program), which was eÅective June 1, 1997, andamended on May 19, 1999, and March 14, 2000, we grant stock options, performance shares, restricted stockand other awards on AT&T common stock, and also granted stock options on AT&T Wireless Group trackingstock prior to the split-oÅ of AT&T Wireless.

Under the initial terms of the Program, there were 30 million shares of AT&T common stock availablefor grant with a maximum of 4.5 million common shares that could be used for awards other than stockoptions. Subsequent to the 1999 modiÑcation, beginning with January 1, 2000, the remaining shares availablefor grant at December 31 of the prior year, plus 1.75% of the shares of AT&T common stock outstanding onJanuary 1 of each year, become available for grant. Under the amended terms, a maximum of 7.5 millionshares may be used for awards other than stock options. In 2001, as a result of the AT&T Wireless split-oÅ,the number of shares available for grant increased by 3.5 million which includes 0.6 million for awards otherthan stock options. In 2002, AT&T restructured stock options and other stock-based awards in conjunctionwith the AT&T Broadband spin-oÅ. The number of shares available for grant increased by 44.5 million whichincludes 0.8 million for awards other than stock options. The exercise price of any stock option is equal to thestock price when the option is granted. Generally, the options vest over three or four years and are exercisableup to 10 years from the date of grant. (All above share amounts have been adjusted for the 1-for-5 reversestock split.)

Under the Program, performance share units are awarded to key employees in the form of either commonstock or cash at the end of a three-year period, based on certain Ñnancial-performance targets.

On April 27, 2000, AT&T created a new class of stock and completed an oÅering of AT&T WirelessGroup tracking stock. Under the Program, AT&T issued AT&T Wireless Group stock options to employees.The exercise price of any stock option was equal to the stock price when the option was granted. Whengranted, the options had a two to three and one-half year vesting period, and were exercisable up to 10 yearsfrom the date of grant. On April 27, 2000, substantially all employees were granted AT&T Wireless Grouptracking stock options.

In connection with the July 9, 2001 split-oÅ of AT&T Wireless Group, all outstanding AT&T WirelessGroup tracking stock options and all AT&T common stock options granted prior to January 1, 2001, wereconverted in the same manner as common shares (see note 1). AT&T modiÑed the terms and conditions of alloutstanding stock option grants to allow the AT&T Wireless common stock options held by AT&T employeesto immediately vest and become exercisable for their remaining contractual term and to also allow the AT&Tcommon stock options held by AT&T Wireless employees to immediately vest and become exercisable fortheir remaining contractual term. In 2001, AT&T recognized $3 million of compensation expense related tothese modiÑcations.

In connection with the spin-oÅ of AT&T Broadband, all outstanding AT&T stock options held by activeAT&T employees were restructured into an adjusted number of AT&T options. All outstanding AT&T stockoptions held by active AT&T Broadband employees were restructured into an adjusted number of AT&TBroadband options and subsequently replaced with new Comcast stock options, and all AT&T stock optionsheld by inactive employees at the time of the spin-oÅ were converted into adjusted AT&T stock options andnew Comcast stock options. In January 2002, AT&T modiÑed the terms and conditions of outstanding AT&Tstock options and other equity awards granted under plans other than the Program and held by AT&TBroadband employees. This modiÑcation provided that upon the change in control of AT&T Broadband, theirstock options and other equity awards granted prior to December 19, 2001, would be immediately vested andexercisable through their remaining contractual term. In 2002, $48 million (pretax) of compensation expenserelated to this modiÑcation was recognized by AT&T Broadband and is included within ""Gain on dispositionof discontinued operations.''

74



Under the AT&T 1996 Employee Stock Purchase Plan (Plan), which was eÅective July 1, 1996, andamended on May 23, 2001, we are authorized to sell up to 21 million shares of AT&T common stock to oureligible employees through June 30, 2006. Under the terms of the Plan, employees may have up to 10% oftheir earnings withheld to purchase AT&T's common stock. The purchase price of the stock on the date ofexercise is 85% of the average high and low sale prices of shares on the New York Stock Exchange for thatday. Under the Plan, we sold approximately 1.3 million, 1.2 million and 1.1 million shares to employees in2002, 2001 and 2000, respectively. (All above share amounts have been adjusted for the 1-for-5 reverse stocksplit.)

A summary of the AT&T common stock option transactions is shown below. (All share and per shareamounts have been restated to reÖect the 1-for-5 reverse stock split.)

Weighted- Weighted- Weighted-Average Average AverageExercise Exercise Exercise

2002 Price* 2001 Price* 2000 Price*

(Shares in thousands)

Outstanding at January 1, ÏÏÏÏÏÏÏÏÏÏÏÏÏ 63,509 $122.90 49,805 $179.10 33,753 $187.10

Options assumed in mergers ÏÏÏÏÏÏÏÏÏÏÏ 5,923 123.55

Options granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,183 68.84 13,680 110.85 14,914 180.60

AT&T Wireless split-oÅ adjustments ÏÏÏ 4,330

AT&T Broadband spin-oÅ adjustmentsÏÏ 37,049

Options and SARs exercised ÏÏÏÏÏÏÏÏÏÏ (436) 32.28 (1,044) 58.15 (2,290) 110.35

Options canceled or forfeited ÏÏÏÏÏÏÏÏÏÏ (17,048) 125.72 (3,262) 155.35 (2,495) 228.05

At December 31:

Options outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 98,257 40.64 63,509 122.90 49,805 179.10

Options exercisable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 46,770 49.88 34,289 130.25 26,290 152.20

Shares available for grant ÏÏÏÏÏÏÏÏÏÏÏÏÏ 27,751 6,944 6,841

* The weighted-average exercise prices for the period prior to the AT&T Wireless split-oÅ in 2001, and for the year ended December 31,

2000, have not been adjusted to reÖect the impact of the split-oÅ. The weighted-average exercise prices for the period prior to the

AT&T Broadband spin-oÅ in 2002, and for the years ended December 31, 2001 and 2000, have not been adjusted to reÖect the impact

of the spin-oÅ.

75



The following table summarizes information about the AT&T common stock options outstanding atDecember 31, 2002:

Options Outstanding Options Exercisable

Weighted-Number Average Number

Outstanding at Remaining Weighted- Exercisable at Weighted-December 31, Contractual Average December 31, Average

Range of Exercise Prices 2002 Life Exercise Price 2002 Exercise Price

(In thousands) (In thousands)

$ 3.93 Ó $23.70 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,368 5.6 $16.76 2,316 $14.57

$23.88 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,417 9.7 $23.88 8 $23.88

$23.94 Ó $28.00 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,166 8.5 $25.75 406 $25.59

$28.03 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,465 9.1 $28.03 422 $28.03

$28.23 Ó $33.66 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,148 8.2 $32.15 3,716 $32.04

$33.68 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,341 8.2 $33.68 2,823 $33.68








98,257 7.4 $40.64 46,770 $49.88

A summary of the AT&T Wireless Group tracking stock option transactions is shown below:

Weighted- Weighted- Average AverageExercise Exercise

2001 Price 2000 Price

(Shares in thousands)

Outstanding at January 1: ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 73,626 $29.29 Ì $ Ì

Options granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,037 $22.57 76,983 $29.29

Options exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1) $22.03 Ì $ Ì

Options canceled or forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,711) $29.11 (3,357) $29.43

Options assumed by AT&T Wireless on July 9th ÏÏÏÏ (74,951)

At December 31:

Options outstandingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì $ Ì 73,626 $29.29

Options exercisable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì $ Ì 12,391 $29.48

Shares available for grantÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 41,874

In 2002, AT&T oÅered employees the option to cancel certain outstanding stock option grants andreplace them with restricted stock units. Approximately 15 million stock options were canceled as a result ofthis oÅer, and 2.5 million restricted stock units were granted which vest over a three-year period. The2.5 million restricted stock units were restructured into 6.5 million units as a result of the spin-oÅ of AT&TBroadband. Those options that were eligible for cancelation but retained by the employee became variableawards and will be marked to market until the options are exercised, forfeited, or expired unexercised. Thecancelation of stock options had an immaterial impact on 2002 results of operations.

76



The weighted-average fair values at date of grant for AT&T common stock options granted during 2002,2001 and 2000 were $24.49, $39.50 and $60.50, respectively, and were estimated using the Black-Scholesoption-pricing model. The weighted-average risk-free interest rates applied for 2002, 2001 and 2000 were3.73%, 4.61% and 6.29%, respectively. The following assumptions were applied for 2002, 2001 and 2000,respectively: (i) expected dividend yields of 1.17%, 0.85% and 1.6%, (ii) expected volatility rates of 40.0%,36.9% and 33.5% and (iii) expected lives of 4.7 years in 2002, 2001 and 2000.

The weighted-average fair values at date of grant for AT&T Wireless Group tracking stock optionsgranted during 2001 and 2000 were $11.58 and $14.20, respectively, and were estimated using the Black-Scholes option-pricing model. The following weighted-average assumptions were applied for 2001 and 2000,respectively: (i) risk-free rate of 4.92% and 6.53%, (ii) expected volatility rate of 55.0% in 2001 and 2000 and(iii) expected lives of 4.8 years and 3.9 years.

EÅective January 1, 2003, AT&T will begin recording compensation expense pursuant to SFAS No. 123,""Accounting for Stock Based Compensation,'' for AT&T common stock options issued subsequent toJanuary 1, 2003. The fair value of these stock options will be measured on the grant date and recognized in theincome statement over the vesting period. (For additional information, see note 2.)

13. Income Taxes

The following table shows the principal reasons for the diÅerence between the eÅective income tax rateand the U.S. federal statutory income tax rate:


2002 2001 2000


U.S. federal statutory income tax rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35% 35% 35%

Federal income tax (provision) at statutory rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (993) $(2,683) $(4,368)

Amortization of investment tax creditsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16 18 23

State and local income tax (provision), net of federal income taxeÅectÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (222) (209) (292)

AT&T Latin America charge ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (360) Ì Ì

Foreign operations, net of tax credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (140) (107) (20)

Investment dispositions, acquisitions and legal entityrestructurings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 93 91 70

Research and other creditsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 51 42 36

Other diÅerences, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (32) (42) 64


EÅective income tax rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56.0% 37.7% 35.9%

77



The U.S. and foreign components of income from continuing operations before income taxes and the(provision) for income taxes are presented in the following table:


2002 2001 2000


Income From Continuing Operations Before Income Taxes

United StatesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,924 $ 7,671 $12,727

Foreign ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (88) (5) (247)

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,836 $ 7,666 $12,480

(Provision) For Income Taxes

Current:

Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,041 $(1,554) (3,126)

State and localÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19 (192) (416)

Foreign ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (95) (98) (87)

965 (1,844) (3,629)

Deferred:

Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,201) (936) (851)

State and localÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (360) (129) (34)

Foreign ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (7) 1 4

(2,568) (1,064) (881)

Deferred investment tax creditsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16 18 23


We also recorded current and deferred income tax beneÑts that resulted from net losses (earn-ings) related to other equity investments in the amounts of $112 million in 2002, $2.9 billion in 2001, and$59 million in 2000.

Deferred income tax liabilities are taxes we expect to pay in future periods. Similarly, deferred income taxassets are recorded for expected reductions in taxes payable in future periods. Deferred income taxes arisebecause of diÅerences in the book and tax basis of certain assets and liabilities.

78



Deferred income tax liabilities and assets consist of the following:

At December 31,

2002 2001


Deferred Income Tax Assets

Reserves and allowances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 845 $2,237

Employee pensions and other beneÑtsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 604 843

Business restructuring ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 297 359

InvestmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 281 423

Net operating loss, capital loss and credit carryforwardsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 252 70

Advance payments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 174 30

Other deferred tax assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 162 419

Valuation allowanceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (689) (34)

Total deferred income tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,926 4,347

Deferred Income Tax Liabilities

Property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,135 3,230

Leveraged and capital leasesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,059 1,078

Capitalized software and intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 743 575

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 818 710

Total deferred income tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,755 5,593

Net deferred income tax liability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3,829 $1,246

The net increase in the valuation allowance in 2002 of $655 million was primarily attributable to the bookand tax basis diÅerence relating to our investment in AT&T Latin America.

At December 31, 2002, the tax eÅect of net operating and capital loss carryforwards for federal and stateincome tax purposes were $10 million and $130 million, respectively, which expire through 2021. In addition,at December 31, 2002, federal tax credit carryforwards were $1 million, with no expiration date, and state taxcredit carry-forwards were $111 million expiring through 2016.

14. Commitments and Contingencies

In the normal course of business we are subject to proceedings, lawsuits and other claims, includingproceedings under laws and regulations related to environmental and other matters. Such matters are subjectto many uncertainties, and outcomes are not predictable with assurance.

In connection with the separation of its former subsidiaries, AT&T has entered into a number ofseparation and distribution agreements that provide, among other things, for the allocation and/or sharing ofcertain costs associated with potential litigation liabilities. For example, pursuant to these agreements, AT&Tshares in the cost of certain litigation (relating to matters while aÇliated with AT&T) if the settlementexceeds certain thresholds. With the exception of the Sparks matter (see note 1), as of December 31, 2002,we have assessed that none of the litigation liabilities allocated to former subsidiaries were probable ofincurring costs in excess of the threshold above which we would be required to share in the costs. However, inthe event these former subsidiaries were unable to meet their obligations with respect to these liabilities due toÑnancial diÇculties, AT&T could be held responsible for all or a portion of the costs, irrespective of thesharing agreements.

79



Consequently, we are unable to ascertain the ultimate aggregate amount of monetary liability or Ñnancialimpact with respect to these matters at December 31, 2002. However, we believe that after Ñnal disposition,any monetary liability or Ñnancial impact to us beyond that provided for at year-end would not be material toour annual consolidated Ñnancial statements.

Leases and Other Commitments

From time to time, AT&T provides guarantees of debt or other obligations relating to former subsidiaries.(Guarantees are occasionally provided for subsidiaries when owned by AT&T or in connection with itsseparation from AT&T. See note 9 for a detailed discussion of these guarantees.)

We lease land, buildings and equipment through contracts that expire in various years through 2040. Ourrental expense under operating leases was $529 million in 2002, $552 million in 2001 and $583 million in 2000.The total of minimum rentals to be received in the future under non-cancelable operating subleases as ofDecember 31, 2002, was $250 million.

The following table shows our future minimum commitments due under non-cancelable operating andcapital leases at December 31, 2002:

Operating CapitalLeases Leases


2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 480 $ 10

2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 409 19




Later years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 460 100

Total minimum lease payments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $2,124 153

Less: Amount representing interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 52

Present value of net minimum lease payments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $101

In addition, under certain real estate operating leases, we could be required to make payments to thelessor of up to $447 million at the end of the lease term (ending in years 2004 through 2007). The actualamount paid, if any, would be reduced by amounts received by the lessor upon remarketing of the property.(See note 18 for a discussion of the possible consolidation of certain of entities that we lease facilities from.)

AT&T has contractual obligations to utilize network facilities from local exchange carriers with termsgreater than one year. Since the contracts have no minimum volume requirement and are based on aninterrelationship of volumes and discounted rates, we assessed our minimum exposure based on penalties toexit the contracts on December 31 of each year. At December 31, 2002, the penalties AT&T would incur if weexited all of these contracts would be $2.1 billion.

15. Segment Reporting

AT&T's results are segmented according to the customers we service: AT&T Business Services andAT&T Consumer Services.

AT&T Business Services provides a variety of services to various sized businesses and governmentagencies including long distance, international, toll-free and local voice, data and Internet protocol (IP)services; managed services; and wholesale transport services.

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AT&T Consumer Services provides a variety of communications services to residential customers,including domestic and international long distance, transaction-based long distance, such as operator-assistedservice and prepaid phone cards; local and local toll (intrastate calls outside the immediate local area); anddial-up Internet.

The balance of AT&T's continuing operations (excluding LMG) is included in a ""Corporate and Other''group. This group primarily reÖects corporate staÅ functions and the elimination of transactions betweensegments. LMG was not an operating segment of AT&T prior to its split-oÅ from AT&T because AT&T didnot have a controlling Ñnancial interest in LMG for Ñnancial accounting purposes. Therefore, we accountedfor this investment under the equity method. Additionally, LMG's results were not reviewed by the chiefoperating decision-makers for purposes of determining resources to be allocated.

Total assets for our reportable segments include all assets, except intercompany receivables. AT&Tprepaid pension assets and corporate-owned or leased real estate are held at the corporate level and thereforeare included in the Corporate and Other group. In addition, as the assets of discontinued operations are notconsidered to be a part of AT&T's ongoing operations, they are included in a category separate fromreportable segments and the Corporate and Other group for reporting purposes. Capital additions for eachsegment include capital expenditures for property, plant and equipment, additions to nonconsolidatedinvestments, and additions to internal-use software (which are included in ""Other assets'').

The accounting policies of the segments are the same as those described in the summary of signiÑcantaccounting policies (see note 2). AT&T evaluates performance based on several factors, of which the primaryÑnancial measure is earnings before interest and taxes, including pretax minority interest and net pretax lossesfrom other equity investments (EBIT).

Generally, AT&T accounts for inter-segment transactions at market prices. AT&T Business Servicessells services to AT&T Consumer Services at cost-based prices, which approximate market prices. GenerallyAT&T Business Services accounts for these sales as contra-expense.

For the Years Ended December 31,Revenue2002 2001 2000


AT&T Business Services external revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $26,235 $27,264 $28,136

AT&T Business Services internal revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 323 441 423

Total AT&T Business Services revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,558 27,705 28,559

AT&T Consumer Services external revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,527 14,843 18,643

Total reportable segments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 38,085 42,548 47,202

Corporate and OtherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (258) (351) (352)

Total revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $37,827 $42,197 $46,850

For the Years Ended December 31,Depreciation and Amortization2002 2001 2000


AT&T Business Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,546 $4,234 $4,255

AT&T Consumer ServicesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 230 200 167

Total reportable segments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,776 4,434 4,422

Corporate and OtherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 112 125 116

Total depreciation and amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,888 $4,559 $4,538

81



For the Years Ended December 31,Net (Losses) Earnings Related to Other Equity Investments2002 2001 2000


AT&T Business Services pretax net (losses) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(454) $(6,482) $ (8)

Corporate and Other pretax net (losses) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (58) (1,301) (43)

Total pretax (losses)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (512) (7,783) (51)

Total tax beneÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 112 2,947 61

Total net (losses) earnings related to other equity investments $(400) $(4,836) $ 10

Reconciliation of EBIT to Income from ContinuingOperations Before Income Taxes, Minority Interest Income

For the Years Ended December 31,and Losses Related to Other Equity Investments2002 2001 2000


AT&T Business Services EBITÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,638 $(2,305) $ 5,917

AT&T Consumer Services EBIT ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,647 4,875 6,893

Total reportable segments EBIT ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,285 2,570 12,810

Corporate and Other EBIT ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (399) (1,063) 1,163

Total EBIT ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,886 1,507 13,973

Deduct:

Minority interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 114 131 41

Pretax net (losses) related to other equity investments ÏÏÏ (512) (7,783) (51)

Add: Interest (expense)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,448) (1,493) (1,503)

Income from continuing operations before income taxes,minority interest income and losses related to other equityinvestments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,836 $ 7,666 $12,480

At December 31,Assets2002 2001


AT&T Business ServicesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $36,365 $ 40,316

AT&T Consumer Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,674 2,141

Total reportable segments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 38,039 42,457

Corporate and Other assets(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,233 19,872

Total assets from discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 103,152

Total Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $55,272 $165,481

(1) Includes cash of $7.8 billion for 2002 and $10.4 billion for 2001

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For the Years Ended December 31,Capital Additions2002 2001 2000


AT&T Business Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3,716 $5,451 $6,841

AT&T Consumer ServicesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 127 140 148

Total reportable segments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,843 5,591 6,989

Corporate and OtherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 63 150 1,594

Total capital additions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $3,906 $5,741 $8,583

Geographic information is not presented due to the immateriality of revenue attributable to internationalcustomers.

ReÖecting the dynamics of our business, we continually review our management model and structure,which may result in additional adjustment to our operating segments in the future.

16. Related Party Transactions

AT&T had various related party transactions with Concert until the joint venture was oÇcially unwoundon April 1, 2002.

Included in ""Revenue'' was $268 million, $1.1 billion and $1.1 billion for services provided to Concert forthe years ended December 31, 2002, 2001 and 2000, respectively.

Included in ""Access and other connection'' are charges from Concert representing costs incurred on ourbehalf to connect calls made to foreign countries (international settlements) and costs paid by AT&T toConcert for distributing Concert products totaling $491 million, $2.1 billion and $2.4 billion for the yearsended December 31, 2002, 2001 and 2000, respectively.

The Consolidated Balance Sheet at December 31, 2001, included a loan of $1.0 billion to Concert, whichwas included within ""Other assets.'' Interest income of $67 million was recognized for the year endedDecember 31, 2000. In the third quarter of 2001, this loan together with the associated accrued interest waswritten oÅ in connection with the decision to unwind Concert (see note 7).

At December 31, 2001, AT&T had a Öoating-rate loan payable to Concert in the amount of $80 million.The loan was included in ""Debt maturing within one year'' at December 31, 2001. This loan was paid oÅ inconjunction with the unwind of Concert. Interest expense was $5 million and $6 million for the years endedDecember 31, 2001 and 2000, respectively.

Included in ""Accounts receivable'' at December 31, 2001, was $438 million related to telecommunica-tions transactions with Concert. Included in ""Accounts payable'' at December 31, 2001, was $201 millionrelated to transactions with Concert.

Included in ""Other receivables'' at December 31, 2001, was $781 million related to administrativetransactions performed on behalf of Concert. Included in ""Other current liabilities'' at December 31, 2001,was $935 million related to administrative transactions performed by Concert on behalf of AT&T.

We had various related party transactions with LMG. Included in ""Costs of services and products'' wereprogramming expenses related to services from LMG. These expenses amounted to $199 million for the sevenmonths ended July 31, 2001, the eÅective split-oÅ date of LMG for accounting purposes, and $239 million forthe year ended December 31, 2000.

83



17. Quarterly Information (Unaudited)

First Second(1) Third Fourth(2)

2002(Dollars in millions, except per share amounts)

Revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 9,548 $ 9,580 $ 9,409 $ 9,290

Operating income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,634 1,592 1,415 (280)

Income (loss) from continuing operationsÏÏÏÏÏÏÏÏÏ 446 603 525 (611)

Net (loss) from discontinued operations (net ofincome taxes) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (565) (13,433) (318) (197)

Gain on disposition of discontinued operations (netof income taxes) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì 1,324

(Loss) income before cumulative eÅect ofaccounting changeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (119) (12,830) 207 516

Cumulative eÅect of accounting change (net ofincome taxes) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (856) Ì Ì Ì

Net (loss) income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (975) (12,830) 207 516


Earnings (loss) per share Ì basic:

Earnings (loss) from continuing operationsÏÏÏÏÏÏÏÏ $ 0.63 $ 0.83 $ 0.68 $ (0.79)

(Loss) from discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏ (0.80) (18.41) (0.41) (0.26)

Gain on disposition of discontinued operations ÏÏÏÏÏ Ì Ì Ì 1.71

Cumulative eÅect of accounting change ÏÏÏÏÏÏÏÏÏÏ (1.21) Ì Ì Ì

AT&T Common Stock Group (loss) earnings ÏÏÏÏÏ $ (1.38) $ (17.58) $ 0.27 $ 0.66

Earnings (loss) per share Ì diluted:

Earnings (loss) from continuing operationsÏÏÏÏÏÏÏÏ $ 0.60 $ 0.80 $ 0.67 $ (0.79)

(Loss) from discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏ (0.76) (17.91) (0.41) (0.26)

Gain on disposition of discontinued operations ÏÏÏÏÏ Ì Ì Ì 1.71

Cumulative eÅect of accounting change ÏÏÏÏÏÏÏÏÏÏ (1.16) Ì Ì Ì

AT&T Common Stock Group (loss) earnings ÏÏÏÏÏ $ (1.32) $ (17.11) $ 0.26 $ 0.66

Dividends declared ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.1875 0.1875 0.1875 0.1875

AT&T common stock

High ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 39.47 $ 32.50 $ 26.35 $ 29.42

Low ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27.62 18.64 16.81 21.43

Quarter-end close ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32.19 21.94 24.62 26.11

84



First Second Third(4) Fourth2001(Dollars in millions, except per share amounts)

Revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $10,890 $10,602 $10,537 $10,168

Operating incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,451 2,265 2,313 803

Income (loss) from continuing operations ÏÏÏÏÏÏÏÏÏÏ 556 (1,433) (1,547) (216)

Net (loss) from discontinued operations (net ofincome taxes)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,804) (525) (548) (1,175)

Gain on disposition of discontinued operations (net ofincome taxes)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 13,503 Ì

Net (loss) income before cumulative eÅect ofaccounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,248) (1,958) 11,408 (1,391)

Cumulative eÅect of accounting change (net ofincome taxes)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 904 Ì Ì Ì

Net (loss) income(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (344) (1,958) 11,408 (1,391)


Earnings (loss) per share Ì basic:

Earnings (loss) from continuing operations ÏÏÏÏÏÏÏÏÏ $ 1.41 $ 0.51 $ (2.68) $ (0.31)

(Loss) from discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2.36) (0.77) (0.77) (1.66)

Gain on disposition of discontinued operationsÏÏÏÏÏÏÏ Ì Ì 19.10 Ì

Cumulative eÅect of accounting change ÏÏÏÏÏÏÏÏÏÏÏÏ 0.47 Ì Ì Ì

AT&T Common Stock Group (loss) earningsÏÏÏÏÏÏÏ $ (0.48) $ (0.26) $ 15.65 $ (1.97)

Earnings (loss) per share Ì diluted:

Earnings (loss) from continuing operations ÏÏÏÏÏÏÏÏÏ $ 1.32 $ 0.48 $ (2.68) $ (0.31)

(Loss) from discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2.21) (0.72) (0.77) (1.66)

Gain on disposition of discontinued operationsÏÏÏÏÏÏÏ Ì Ì 19.10 Ì

Cumulative eÅect of accounting change ÏÏÏÏÏÏÏÏÏÏÏÏ 0.44 Ì Ì Ì

AT&T Common Stock Group (loss) earningsÏÏÏÏÏÏÏ $ (0.45) $ (0.24) $ 15.65 $ (1.97)

Dividends declaredÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.1875 0.1875 0.1875 0.1875

AT&T Wireless Group (loss) earnings fromdiscontinued operations per basic and diluted share(3),(6)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (0.02) $ 0.08 Ì Ì

Liberty Media Group (loss) earnings per basic anddiluted share(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (0.06) $ (0.82) $ 0.04 Ì

Stock price(8)

AT&T common stock

High ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 40.00 $ 37.05 $ 44.00 $ 41.01

Low ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27.67 31.56 33.85 30.24

Quarter-end closeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33.92 35.03 39.57 37.19

AT&T Wireless Group common stock(6)

High ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 27.30 $ 21.10 $ 19.92 Ì

Low ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17.06 15.29 12.52 Ì

Quarter-end closeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 19.18 16.35 Ì Ì

Liberty Media Group Class A common stock(7)



Quarter-end closeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14.00 17.49 Ì Ì

85



2001 First Second Third(4) Fourth

(Dollars in millions, except per share amounts

Liberty Media Group Class B common stock(7)



Quarter-end closeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15.00 18.15 Ì Ì(1) The loss from discontinued operations in the second quarter of 2002 included impairment charges of $16.5 billion ($11.8 billion after-

tax) of goodwill and franchise costs.

(2) Fourth quarter 2002 net income included $1,463 of net restructuring and other charges.

(3) Earnings per share (EPS) in each quarter is computed using the weighted-average number of shares outstanding during the quarter

while EPS for the full year is computed using the weighted-average number of shares outstanding during the year. Thus, the sum of

the four quarters' EPS does not always equal the full-year EPS.

(4) Third quarter 2001 net income included a gain on disposition of discontinued operations of $13,503, or $19.10 per share.

(5) First quarter 2001 net income included cumulative eÅect of accounting change of $359 and $545, or $0.44 per diluted share and $0.21

per share, for AT&T Common Stock Group and LMG, respectively, due to the adoption of SFAS No. 133.

(6) No dividends had been declared on AT&T Wireless Group common stock. AT&T Wireless Group was split-oÅ from AT&T on July 9,

2001.

(7) No dividend had been declared on LMG common stock. LMG was split-oÅ from AT&T on August 10, 2001.

(8) Stock prices obtained from the New York Stock Exchange Composite Tape. AT&T Common Stock prices have been restated to

reÖect the spin-oÅ of AT&T Broadband and for the 1-for-5 reverse stock split.

18. Variable Interest Entities

As stated in note 19, AT&T is currently assessing the potential impacts of FASB Interpretation No. 46,""Consolidation of Variable Interest Entities.'' As part of that assessment, we have determined that one entity,from which we currently lease two buildings, may be determined to be a Variable Interest Entity and subjectto consolidation. We have no ownership interest in this entity and our transactions with it have met therequirements to be classiÑed as operating leases, with AT&T being the lessee. At the end of their respectivelease terms (including any extensions), AT&T has the option to: renew the lease for a new term, purchase theproperty at the unamortized loan funding amount, or exercise the remarketing option. Under the remarketingoption, AT&T could be held liable for a loss in value relative to the properties. At December 31, 2002, ourmaximum exposure was $99 million. This entity has approximately $105 million of total assets, (principallythe leased properties) and $110 million of liabilities (principally long term debt secured by the properties).

In addition, we have six leases with another entity, having characteristics similar to those describedabove. It is possible that this entity may be deemed to be a VIE. We may, therefore, have variable interests inspeciÑed assets of this entity and be subject to ""silo'' consolidation of the speciÑc assets and related liabilities.At December 31, 2002, our maximum total exposure related to this entity was $328 million. The estimatedbuilding value is approximately $362 million and the outstanding long-term debt is approximately$386 million.

19. New Accounting Pronouncements

In August 2001, the FASB issued SFAS No. 143, ""Accounting for Asset Retirement Obligations.'' Thisstandard requires that obligations that are legally enforceable and unavoidable, and are associated with theretirement of tangible long-lived assets, be recorded as liabilities when those obligations are incurred, with theamount of the liability initially measured at fair value. The oÅset to the initial asset retirement obligation is anincrease in the carrying amount of the related long-lived asset. Over time, this liability is accreted to its futurevalue, and the asset is depreciated over the useful life of the related asset. Upon settlement of the liability, anentity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. SFAS

86



No. 143 is eÅective for Ñnancial statements issued for Ñscal years beginning after June 15, 2002. For AT&T,this means that the standard was adopted on January 1, 2003. AT&T currently includes in its groupdepreciation rates an amount related to the cost of removal for certain assets. However, such amounts are notlegally enforceable or unavoidable; therefore, AT&T will be required to reverse the amount accrued inaccumulated depreciation. As of January 1, 2003, AT&T will report approximately $40 million as thecumulative eÅect of a change in accounting principles related to this reversal. The impact of no longerincluding the cost of removal in the group depreciation rates, coupled with the cumulative eÅect impact onaccumulated depreciation, will result in a decrease to depreciation expense in 2003. However, the costsincurred to remove these assets will be reÖected as a cost in the period incurred as ""Costs of services andproducts.''

On June 28, 2002, the FASB issued SFAS No. 146, ""Accounting for Exit or Disposal Activities.'' Thisstatement addresses the recognition, measurement and reporting of costs that are associated with exit anddisposal activities. This statement includes the restructuring activities that are currently accounted forpursuant to the guidance set forth in EITF 94-3, ""Liability Recognition for Certain Employee TerminationBeneÑts and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring),'' costsrelated to terminating a contract that is not a capital lease and one-time beneÑt arrangements received byemployees who are involuntarily terminated -nullifying the guidance under EITF 94-3. Under SFAS No. 146the cost associated with an exit or disposal activity is recognized in the periods in which it is incurred ratherthan at the date the company committed to the exit plan. This statement is eÅective for exit or disposalactivities initiated after December 31, 2002, with earlier application encouraged. Previously issued Ñnancialstatements will not be restated. The provisions of EITF 94-3 shall continue to apply for exit plans initiatedprior to the adoption of SFAS No. 146. Accordingly, the initial adoption of SFAS No. 146 will not have aneÅect on AT&T's results of operations, Ñnancial position or cash Öows. Liabilities associated with future exitand disposal activities will not be recognized until actually incurred.

In December 2002, the FASB issued SFAS No. 148, ""Accounting for Stock-Based Compensation ÌTransition and Disclosure Ì an amendment of FASB Statement No. 123.'' This standard provides alternatemethods of transition for a voluntary change to the fair value method of accounting for stock-based employeecompensation and requires more prominent disclosure about the method used. This statement is eÅective forÑscal years ending after December 15, 2002. For AT&T, this means it is eÅective for December 31, 2002.Currently AT&T applies the disclosure-only provisions of SFAS No. 123, ""Accounting for Stock-BasedCompensation'' and we do not expense our stock options. However, as previously announced, AT&T will beginexpensing all stock options issued after January 1, 2003, and will continue to apply the disclosure-onlyprovisions to stock options issued prior to January 1, 2003. This method of transition is in compliance with theprovisions of SFAS No. 148. The adoption of the disclosure provisions of SFAS No. 148 will not have animpact on AT&T's results of operations, Ñnancial position or cash Öows; however, the expensing of the stockoptions issued after January 1, 2003, will have a negative impact on our results of operations.

In November 2002, the FASB issued FASB Interpretation No. (FIN) 45, ""Guarantor's Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.'' FIN 45requires that an entity issuing a guarantee (including those embedded in a purchase or sales agreement) mustrecognize, at the inception of the guarantee, a liability equal to the fair value of the guarantee. FIN 45 alsorequires detailed information about each guarantee or group of guarantees even if the likelihood of making apayment is remote. The disclosure requirements of this interpretation are eÅective for Ñnancial statements ofperiods ending after December 15, 2002, which makes them eÅective for AT&T for December 31, 2002 (seenote 9 for the disclosures required under this interpretation). The recognition and measurement provisions ofthis Interpretation are applicable on a prospective basis to guarantees issued or modiÑed after December 31,2002. FIN 45 could have an impact on the future results of AT&T depending on guarantees issued; however,at this time we do not believe that the adoption of this statement will have a material impact on our results ofoperation, Ñnancial position or cash Öows.

87



In January 2003, the FASB issued FIN 46, ""Consolidation of Variable Interest Entities Ì an Interpreta-tion of Accounting Research Bulletin (ARB) No. 51.'' FIN 46 requires the primary beneÑciary to consolidatea variable interest entity (VIE) if it has a variable interest that will absorb a majority of the entity's expectedlosses if they occur, receive a majority of the entity's expected residual returns if they occur, or both. FIN 46applies immediately to VIEs created after January 31, 2003, and to VIEs in which the entity obtains aninterest after that date. For VIEs acquired before February 1, 2003, the eÅective date for AT&T is July 1,2003. AT&T is currently in the process of determining the impact of this statement on its results of operations,Ñnancial position and cash Öows. The disclosures relating to our present involvement with VIEs and ourmaximum exposure to losses are included in note 18.

In November 2002, the EITF reached a consensus on EITF 00-21, ""Revenue Arrangements withMultiple Deliverables,'' related to the timing of revenue recognition for arrangements in which goods orservices or both are delivered separately in a bundled sales arrangement. The EITF requires that when thedeliverables included in this type of arrangement meet certain criteria they should be accounted for separatelyas separate units of accounting. This may result in a diÅerence in the timing of revenue recognition but will notresult in a change in the total amount of revenue recognized in a bundled sales arrangement. The allocation ofrevenue to the separate deliverables is based on the relative fair value of each item. If the fair value is notavailable for the delivered items then the residual method must be used. This method requires that the amountallocated to the undelivered items in the arrangement is their full fair value. This would result in the discount,if any, being allocated to the delivered items. This consensus is eÅective prospectively for arrangementsentered into in Ñscal periods beginning after June 15, 2003, which, for AT&T, is July 1, 2003. AT&T iscurrently evaluating the impact of this consensus on its results of operations, Ñnancial position and cash Öows.

In January 2003, the EITF reached a consensus on EITF 02-18, ""Accounting for SubsequentInvestments in an Investee after Suspension of Equity Method Loss Recognition.'' This consensus states thatif the additional investment, in whole or in part, represents the funding of prior losses, the investor shouldrecognize previously suspended losses. This determination would be based on various factors includingwhether the investment results in an increased ownership percentage, the fair value of the considerationreceived is equivalent to the consideration paid and whether the investment is acquired from a third party ordirectly from an investee. If any of these provisions are met, the additional investment would generally not beconsidered as funding prior losses. When appropriate to recognize prior losses, the amount recognized wouldbe limited to the amount of the additional investment determined to represent the funding of prior losses. Theconsensus will be eÅective for additional investments made after February 5, 2003.

20. Subsequent Events

In January 2003, AT&T early retired $3.7 billion of long-term notes. In February 2003, AT&T redeemedexchangeable notes that were indexed to AT&T Wireless common stock and subsequently sold its remainingAT&T Wireless holdings. For further information on these items, see notes 7 and 8.

88

O AT&T Board of Directors

David W. Dorman, 49Chairman of the Board and ChiefExecutive Officer since November 2002. Elected to theBoard in 2002.

Kenneth T. Derr, 66Retired Chairman of the Boardand Chief Executive Officer ofChevron Corporation, an international oil company. Director since 1995. 2, 3

M. Kathryn Eickhoff, 64President of Eickhoff Economics,Inc., an economic consulting firm.Director since 1987. 1, 3

Frank C. Herringer, 60Chairman of the Board and former Chief Executive Officer ofTransamerica Corporation, afinancial services company,which was acquired in 1999 byAegon N.V., an international insurance organization. Electedto the Board in 2002. 1, 2

Amos B. Hostetter, Jr., 66Chairman of Pilot House Associ-ates, LLC, a family investmentcompany. Director since 1999. 1, 2

Shirley Ann Jackson, Ph.D., 56President of Rensselaer Polytechnic Institute. Elected tothe Board in 2001. 2, 3

Jon C. Madonna, 59Retired Chairman and ChiefExecutive Officer of KPMG, aninternational accounting and consulting firm. Director since2002. 1

Donald F. McHenry, 66Distinguished Professor in thePractice of Diplomacy at theSchool of Foreign Service atGeorgetown University, and President of IRC Group LLC,international relations consultants. Director since 1986.1, 3

Tony L. White, 56Chairman of the Board, President,and Chief Executive Officer ofApplera Corporation, a life sci-ences company. Elected to theBoard in 2002. 2, 3

1. Audit Committee 2. Compensation and Employee

Benefits Committee 3. Governance and Nominating

Committee

Ages are as of April17, 2003.

89

O Senior Leadership Team

David W. Dorman Chairman of the Board andChief Executive Officer

Betsy J. Bernard President

James W. Cicconi General Counsel and ExecutiveVice PresidentLaw and Government Affairs

Hossein Eslambolchi President of AT&T Labs,Chief Technology Officer and AT&T Business Chief Information Officer

Mirian Graddick-Weir Executive Vice PresidentHuman Resources

Thomas W. Horton Senior Executive Vice President,Chief Financial Officer

Frank Ianna PresidentAT&T Network Services

John C. Petrillo Executive Vice PresidentCorporate Strategy andBusiness Development

John Polumbo President and Chief ExecutiveOfficerAT&T Consumer

Kenneth E. Sichau President AT&T Business Sales

Constance K. Weaver Executive Vice PresidentPublic Relations, Brand &Business Marketing

Nicholas S. CyprusVice President and Controller

Edward M. DwyerVice President and Treasurer

Robert S. FeitVice President, Lawand Corporate Secretary

Richard E. Sullivan, Jr. Investor Relations Vice President

Other Corporate Officers

David Dorman, Betsy Bernard,Tom Horton

Jim Cicconi, Connie Weaver,Frank Ianna

John Petrillo, Mirian Graddick-Weir, John Polumbo

Hossein Eslambolchi, Ken Sichau

90

O Corporate Information

Corporate HeadquartersOne AT&T WayBedminster, NJ 07921-0752

BusinessAT&T Business has relationshipswith about 4 million business cus-tomers worldwide who depend onAT&T for voice, data, Internet andmanaged solutions. For moreinformation about AT&T Businessand our products and services, visit our Web site at www.att.com/business. Small/medium businesscustomers can find the right communications solution with the convenience of on-line salesand service by visitingwww.att.com/businesscenter/smbushome.html. Large/ global busi-ness customers can access ourexpansive set of local to globalbusiness solutions by visitingwww.att.com/businesscenter/lgbushome.html. Government cus-tomers can locate our suite of inte-grated technology solutions withprofessional service expertise byvisiting www.att.com/gov.

ConsumerAT&T Consumer has nearly 50 mil-lion customer relationships andoffers services as diverse as longdistance and local services,domestic and international callingplans, prepaid and subscribercalling cards, and dial-up andbroadband Internet access.AT&T Consumer also offers cus-tomers the convenience of onlinebilling, ordering and customer ser-vice. To order a consumer service,visit our Web site atwww.consumer.att.com.

AT&T on the World Wide WebThe AT&T Internet home page –www.att.com – is your entry pointto a vast array of services andinformation. One of the most visit-ed sites on the Internet, att.comgives you access to the latestAT&T products for your home,along with the convenience andsecurity of online ordering andbilling. The site connects businesscustomers to the services andinnovation that give their compa-nies a competitive advantage. Inaddition, you can navigate to cur-rent company news, connectionsto investor and corporate informa-tion and the latest advances fromAT&T Labs.

AT&T GivingFor more than 100 years, AT&Thas built a tradition of investing inlocal communities through ourongoing support for education,civic and community service, theenvironment and the arts. In 2002,the AT&T Foundation contributednearly $40 million to nonprofitorganizations in local communitiesthroughout the United States andmany other countries. Also in2002, AT&T employees volun-teered nearly 750,000 hours ofcommunity service through theAT&T CARES program. For moreinformation on the AT&T Founda-tion and AT&T CARES, visit ourWeb site atwww.att.com/foundation.

Environment, Health & SafetyAT&T is dedicated to creating asafe and healthy workplace forAT&T employees and strives tomaintain our reputation as one ofthe top corporate environmentalchampions. More informationabout AT&T's environment, health and safety initiatives maybe found at our Web site:www.att.com/ehs/.

TelecomPioneers Since 1911, AT&T has been asponsor of TelecomPioneers (for-merly Telephone Pioneers ofAmerica), the world's largest,industry-based volunteer organi-zation. AT&T employees andretirees comprise more than57,000 of its members. In 2002,TelecomPioneers awarded theAT&T Pioneers its first President'sInnovation Award. For more infor-mation on the AT&T Pioneers, visitour Web site atwww.attpioneers.org.

Supplier Diversity InitiativeAs part of AT&T's Supplier Diversi-ty initiative, approximately $870million of AT&T's total purchases in2002 were made from minority-,women- and service-disabled vet-eran-owned business enterprises.More information is available at ourWeb site:www.att.com/supplier_diversity/.

AT&T Communications Action Network (CAN)On February 20, the FCCannounced its Triennial Reviewdecision, approving new rules togive states more authority over the$125 billion U.S. local-telephonemarket. Jim Cicconi, AT&T Corp.General Counsel and ExecutiveVice President, Law and Govern-ment Affairs, said, “the result isthat consumers will see lowerprices and more choices in themarketplace, and the economy willexperience more investment andgreater innovation.” To learn moreabout this and other importantAT&T public policy issues, visit theCAN Web site at www.attcan.org.While you’re there, sign up andjoin our Communications ActionNetwork!

91

O Shareowner Information

Shareowner ServicesYou can get up-to-the-minute infor-mation about your AT&T invest-ment 24 hours a day by visitingwww.att.com/ir – the AT&T InvestorRelations Web site – where you willfind current stock quotes, histori-cal stock prices, financial results,tax basis information, investornews and online access to yourAT&T shareowner account. Getfast information about how toarrange for the direct deposit ofdividends, change your address,reinvest your dividends or transferownership of your shares. If youneed more information, send an e-mail to [email protected], orcontact us by phone at 1-800-348-8288. Our interactive voice-response system can answer mostof your questions 24 hours a day,seven days a week. Representa-tives are available Mondaythrough Friday, 8 a.m. to 5 p.m.(Eastern), to assist you. Shareown-ers outside the United States maycall 1-816-843-4282. Shareownersusing a telecommunicationsdevice for the deaf (TDD) may call 1-800-822-2794. Our fax number is 1-781-575-3261, andour mailing address is: AT&T Shareowner Services, c/o EquiServe, P.O. Box 43007, Providence, RI 02940-3007.

Electronic Access to Proxy MaterialsIn an effort to reduce the printingand mailing costs associated withthe distribution of the AT&T AnnualReport and Proxy Statement, AT&Tregistered shareowners can elec-tronically access, view and down-load the AT&T Annual Report andProxy Statement and other materi-als at the AT&T Investor RelationsWeb site at www.att.com/ir. AT&Tshareowners can choose thisoption by marking the “ElectronicAccess” box on the proxy card orby following the instructions pro-vided when voting by telephone orthe Internet. If you choose thisoption prior to each shareownermeeting, you will receive yourproxy card, which provides anotice of meeting and a business-reply envelope. Beneficial ownerscan request the electronic-accessoption by contacting their brokeror financial institution.

Dividend Reinvestment PlanParticipating in the AT&T Share-owner Dividend Reinvestment andStock Purchase Plan (DRP) is aconvenient, systematic way tobuild your investment. Under Divi-dend Reinvestment, all or a portionof your dividends are automaticallyreinvested to purchase additionalshares of AT&T common stock.Participants receive periodicaccount statements tracking rein-vestment transactions andaccount balances. Additionalshares of AT&T common stock canbe purchased with cash or auto-matic monthly investments fromyour bank account. Fees mayapply to certain transactions. Toobtain a Plan prospectus, contactEquiServe at 1-800-348-8288.

Direct Registration of AT&T SharesAT&T shareowners are finding itconvenient to have shares held inthe Direct Registration System,which gives you full ownership of your shares. With Direct Regis-tration, AT&T's transfer agent (EquiServe) holds the shares inyour name. You retain full owner-ship and continue to receive allAT&T dividends, shareowner com-munications, annual reports andproxy-voting material. You caneasily get your account balance orsell your shares by phone or viathe Internet. It's safe and conve-nient. For more information on thisservice, contact EquiServe at1-800-348-8288.

Stock InformationAT&T (ticker symbol “T”) is listedon the New York Stock Exchange,as well as the Boston, Chicago,Cincinnati, Pacific and Philadel-phia exchanges in the UnitedStates; and the Euronext-Paris,and the London and Geneva stockexchanges. As of December, 31,2002, AT&T had approximately783 million shares outstanding,held by more than 3.3 millionshareowners.

Additional Financial InformationA copy of AT&T’s Annual Report onForm 10-K, filed with the Securitiesand Exchange Commision, maybe obtained free of charge bysending a request to: One AT&T WayBedminster, NJ 07921Attention: Investor Relationsor may be accessed electronicallyat www.att.com/ir/.

92

O Our Common Bond

This annual report is printed on recycled paper containing a minimum of 10 percent de-inked post-consumer fiber. Please recycle. © 2003 AT&T. All rights reserved. Printed in the USA

We commit to these values toguide our decisions and behavior:

Respect for IndividualsWe treat each other with respectand dignity, valuing individual andcultural differences. We communi-cate frequently and with candor,listening to each other regardlessof level or position. Recognizingthat exceptional quality beginswith people, we give individualsthe authority to use their capabili-ties to the fullest to satisfy theircustomers. Our environment sup-ports personal growth and contin-uous learning for all AT&T people.

Dedication to Helping CustomersWe truly care for each customer.We build enduring relationships byunderstanding and anticipatingour customers’ needs and by serv-

ing them better each time than thetime before. AT&T customers cancount on us to consistently deliversuperior products and servicesthat help them achieve their per-sonal or business goals.

Highest Standards of IntegrityWe are honest and ethical in all ourbusiness dealings, starting withhow we treat each other. We keepour promises and admit our mis-takes. Our personal conductensures that AT&T’s name isalways worthy of trust.

InnovationWe believe innovation is theengine that will keep us vital andgrowing. Our culture embracescreativity, seeks different perspec-tives and risks pursuing newopportunities. We create andrapidly convert technology intoproducts and services, constantlysearching for new ways to maketechnology more useful to cus-tomers.

TeamworkWe encourage and reward bothindividual and team achieve-ments. We freely join with col-leagues across organizationalboundaries to advance the inter-ests of customers and shareown-ers. Our team spirit extends tobeing responsible and caring part-ners in the communities where welive and work.

By living these values, AT&Taspires to set a standard of excel-lence worldwide that will rewardour shareowners, our customers,and all AT&T people.

One AT&T Way/Bedminster, NJ 07921/www.att.com ATT-AR-2002

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